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Copper is the New Oil

2021-05-18

A surge in green capex—combined with the lack of copper mining projects—will lead to a multi-year bull market in copper, explains Goldman Sachs Research’s Nick Snowdon. 

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exchanges at Goldman Sachs, where we discuss developments, curtly, shaping markets, industries and the global economy, I announced Nathan senior strategists within Collins actually search. My guest today is Snowden, also Goldman Sachs reason who's out with new research and copper and its critical wall and meeting the world's electricity needs Nick welcomed the programme? Thank you Nick. You and your team published a report earlier this year. That said, the copper is the new oil, meaning that its now, this strategically most important resource in the commodity complex. Why is copper strategically important today when you look at the parish, climate goals and ultimately the path tonight?
their emissions, it that's gonna, be achieved, predominate via abatement I, via electrification and renewable energy, then copper, it's gonna be the most critical raw material to achieving that goal, because it's the most cost effective conducted metal is used in. Capturing storing transporting electricity and when look at the ready key areas of the green economy, whether its electric vehicles, electric vehicle infrastructure, renewables turbines solar coppers used in much more in and say volume levels than in the old economy equivalent, but I think the other power oil mentioned the oil in the two thousands relates to the black. supply side, preparation for this demand boom, and I think that's equally important. Why we're talking about copper, letting you ve got his very strong grandma story, but you also have a supply side that completely unprepared.
no real investment in new mine projects, and so essentially the copper market to sleep walking into yeah, really sizeable supply crunch akin to what we saw in the oil market back in the two thousands, but in some ways we ve seen climate change obviously coming and these different efforts to let me mediated building over many many years, why has the copper industry been so caught off, guard yeah, I think, ultimately Janni really over the past six months or so that you ve had a real awakening to one? How powerful there in demand. Volumes are gonna, be over the course of the decade, and I think that does relate to a shift in policy. First time? Really you have? U S? Europe, China, all extremely front further in terms of decolonization policy targets that now it can see already find a feature into growth and capital flows into a key part of the green economy. Shall I do think that
You knew you have. I think we go about six months ago, all year or two ago, was a bit more theoretical, now We can really say that the policy initiatives driving rapid growth in those sectors. Writing that's really important but I think the other reason why now is the time to raise the folks on copyright? Is the fact that the supply side is not reacting over the last twelve aid months we have not seen a single new major copper project being approved. So despite this very powerful green demo narrative, despite all a very high copper prices, its complete state of inaction from the people sign and inside? I really means they. Supply crunch is becoming very real and think, finally, because the long lead times in supply response, because it takes four to five years for a copper mine to be developed. Even if it's just an egg listing mine and even longer for new might we have to address. The issue now, because you can't wait two or three years down the road books by then, it will be too
I am essentially won't sleep walk into huge deficits and scarcity in private laughter eyes, even higher than is currently are based case. So how do you see All of these dynamics affecting copper places. Where do you expect them to go over the medium and longer term, yet here, we essentially see a progressive path towards the meetings for enemy coffee prices in dollars per tonne, so twenty twenty two, we see copper prices averaging around twelve thousand dollars baton from today's price. Serve around ten thousand dollars baton, but then into twenty twenty four rising to fourteen thousand as an average and then fifteen thousand as an average. It really chief, that average price path aids quite possible a couple rally. To the mid teen. So amid items by the middle of the decade now, what's gonna drive that is ultimately gonna, be a progressive, sat, a very tight fundamental balances, and that starts now the guy,
look at the market. This year is set to be in a pretty deep deficit with very low inventories as a starting point and into twenty twenty two We see that deficit continue inside. You have a right classic story of inventories falling to very low levels over the back off for this year and next year and very tight conditions underpinning that rising price. Twenty three will be a bit of a pause because the market measures too modest surplus, but again from twenty four and twenty five, those really big deficit start to emerge. Adding the key is by the second half of this decade. That's when you start to see some ready mega size deficits emerging that have to be solved now through very high prices and stimulating supply, so ultimately, price rises, underpinned by tightness now and through the course of the next four to five years. Everything about the demand coming from climate change. Obviously we envision it happening over many years in years, if not decade.
Where is it a man coming from now that's leading to such Tate and metals? Yes, I think so It's really tying a cop market, as of today is your can of course old industrial demand centres. I things like manufactured goods construction. Yeah. We can see that the global manner I drink supply chain currently is really booming. Western households are buying durable goods in a very aggressive manner than I think. That's gonna be a key driver of demand trends over the next twelve eighteen months, demand is there. We already have around a million tonnes of green demand in the market as of twenty twenty one but that only represents around four percent of global demand, but it's over the next two to three years, at green demand. China really start that take off by the middle of a decade. Green demand would
This, in turn around two and a half million tons of copper a year which is gonna, be close to eight nine percent of global demand, and then, by the end of the decade, it will have risen to just on the six million tonnes of copper demand a year which, by that will be close to twenty percent of global demands are right now, you know in absolute terms. Green demand is not really the key forced tying the market, but over the next. Years it will really compound into a significant driver of the market, and I think, when you look at it over the course of the decade, the volley grace from that channel will be equivalent to what we saw from China joined them to thousands and first off of twenty times. I can't overstepped your how significant it will be in terms of demand impact. You ve talked about the Vatican, industry is behind in meeting this coming demand. How will the industry's all for that I think, ultimately, it will be solved fire one,
necessary surge in oil supply investment and were right at the very beginning of that process you haven't, seen a single major copper project approved over the past eighteen months? and we need to see a record volume of copper mine projects approved the long term supply gap in the market. So when you look forward ten years that gap currently stands just over eight million tonnes for nearly forty percent of the size of the market. In terms of the long term shortfall, that's larger than anything we ve seen in the history of the common market We need an enormous number of copper mine projects approved. There is enough, copper out there This isn't a story of the depletion of copper. All but is a very limited, less currently of copper projects and the quality of those projects is relatively low, so to get from where we are today with no investment to solving. Now what is the largest long term supply gap. You're gonna have to singing
credibly high copper price to stimulate a shift in mining sector stones, nothing that will start to happen over the next year. Someone has to happen given the lead times on price, the other part of the market, solving the significant forward supply crunch, if based around shorter cycle response channels, such as scrap and substitution, I do think that prices surge. You will also see a significant increase in copper, scrap supply. We think over the course of the decade. It will rise by nearly four million tonnes of about fifty percent, increasing global scrap supply side, that is really going to be an important channel of Influenza asked to grow, but on its own not be enough to solve the long term supply got. You have to have already significant increase in mind, supply investment. Why is there such a to call to mind supply investigate. Why do we have so few projects getting approve right now? One of the key obstacles
the reason why, first of all the project less right now is so short and the quality of life, because the mining sector for the last decade has been on a very conservative setting in terms of balance sheet activities. Are they have invested in new mind projects? They have invested exploration or early stage for development, so yeah, really the quality of projects compared to ten fifteen years ago, is very poor in that context, nothing. The next question is yes: this done that, but we can also, the prices are now a record. all surely that should start to generate a shift in supply side, attitudes towards growth and the evidence so far is other direction are still a lot of constraint. I think there are four factors driving out one: do you have to go to the early twenty tends to see the last Why, when the mining sector sway aggressively towards growth and shortly after collapse, in price that really said have punished. Any producer who invested heavily in a new projects
what management teams lost their jobs? memory lingers really amongst the current generation of producer managements. I think that's one key factor. I think the second is to tackle but suddenly you're covered from an operational standpoint, really great challenges in doing anything new at an existing mine site, let alone my site is difficult to move labour around the world globally machinery supply chains and try to be tight. I I think until covered is no Hunger and operational challenge will be very difficult to do anything new. You can announce it, but actually progressing approach would be Sonny. I challenge a third key factor ultimately relates to the challenges of yesterday and the focus on our mental and social issues, which are very important, but equally you know they do led to much more jobs.
Dan did early stage. Planning processes for mines are getting upon it for new project. Really, it's gonna take a significant period of time. I think that final challenge really for producers- and this goes back to the first point- the quality of life Jackson LA la the costs, are higher. So it's not an easy proposition is saying: ok, let's just investing growth, because the economics are not as attractive as they were. You go back to the mid late. Two thousand. I think all of those are combining to generate this restrained and really do anything that can break that has to come from price dynamics and young, incredibly high price, and we don't think the current prices. Yet at the level, generate that shift. Earlier this month, you and your team hardly Neurology as copper day, you hosting the chinese rule, seven global, copper producers. Are you getting any indication from them that this investment mindset is shifting or what were the key take away from the about just starting out?
copper Davis, yeah really fascinating about respect, because our key folk Why is there going to be any indication given how strong copper prices have been over the last two to three months? That management thinking around I started to change and the answer was pretty clear: now a single one of their producers that indicated that they were looking at New green field project The other got a number of existing projects had ever knows about an already expect to be approved, but nothing new and nothing could have large scale to somehow shift the overall perception of consent, on the supply side, and they were very clear about the fact as restraining up, but I think permitting was a big issue. You have to look at new projects and the lead times, I'm getting new projects off the ground. The additional costs are now
Todd than they were a decade ago. Nothing that just leads to a branch- and I know some interesting Lee and times of inorganic price options. You're buying price for companies because of the very hard copper price there are already seeing the sellers of assets, push our price so united, really inclined to God and by grapes from other companies either. So I think the only way that can change is yet again coming back to the copper price that has to be the key incentive driver to shift the mining sector stones within it. other key take ways from the event when I The focus on the green transition and economic demand effects there. suddenly a belief that, over time you will start to see consumers of copper a french aid by the carbon footprint of production? And so doesn't it like taken their will ultimately be a green premium for copper? You need not necessarily click out in terms of time frame barbarity,
belief that every producer- and yet you really are investing in lowering your comfort in the production process. Then you know you will benefit in terms of the customers that are willing to buy your copper verses, yeah, let's say non green produce, citing that's a pretty entrenched leave, but I would say not just a key take away- was that there's no evidence of a pivot towards growth. A number of reasons, as we have already discussed, were listed flat, I think that was ready surprising to everyone, because they expected some shift it with the fact that copper prices rose to a record level that weak, but there was no evidence about, how much of a world you expect China to play in this evolution toward a copper super cycle cycle Is there really fascinating point around the distribution of green copper demand? Because when you look at the regional breakdown of that significant growth in green demands. Gonna come from its not a China story, China. represent around a third of the fire.
Billion tons of growth that were projecting for this decade, but the? U S and Europe will both represent around a quarter age and the rest of wild caught a substantial residual portion. That's a very different. on the environment, to what we ve seen over the past twenty years for copper. If you look at the damage growth composition over at previous twenty appeared, China, actually generated. All of it covers being about. China has been about chinese construction has been about chinese credit cycle, so changing were now an environment where the money, a more balanced in terms of a geographical composition and so for once we do now air about policy developments in Brussels in DC, inasmuch as Beijing, and I think that already makes copper and much more attractive investment proposition for folks, far less China, Centric and tied to a broader global thematic. So what would you say if the key message for investors, wiping the key
message is that, even though we ve seen very strongly up in prices over the past year and now at record levels, we This is only the first year of a multi annual market, clearly near time? The markets can remain tide. We have deficits over the course of this year and next year inventories will run down to very low levels. We believe by the middle of twenty twenty. Two, so that will be a very powerful upward influence on price over the next twelve months, but that also this really significant supply crunch that we talked about that plays out from them of this decade onwards and given that the mining sectors, still in a very restrained state towards Christ. It's gonna take a multi appeared to solve that. There's. I've reiterated that through the courts all current price levels are not generating back in a shift towards growth, and so who'll, there's really sharp increase in mine investment and cutbacks, goes back to the levels that we saw in late, two thousand Maroni there
That currently think, where long way from declaring mission accomplished something naturally the key message year, one of a multi annual market ready lies ahead of us. Thanks for joining us like great thanks. Robbing me that includes is, at the sight of extent, he's like Goldman Sachs things for listening, and if you enjoy the shell, we hope you subscribe and Apple pie pass only the common generating this talk, ass reported on May fourteen. Twenty twenty one, all price references and market forecasts correspond to the date of this recording. This podcast should not be copied distributed, published or reproduced in whole or in part. The information contained in this package does not constitute research or recommendation from any Goldman Sachs Entity to the listener. Neither Goldman Sachs nor any of its affiliates makes any represented
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Transcript generated on 2021-07-01.