By– Benedikt Sobotka, CEO of Eurasian Resources Group:
Analysts at Macquarie Group recently sparked a debate by declaring that the “commodities supercycle is dead”. At Eurasian Resources Group, we take an opposing view. The notion of a supercycle, or a period of prolonged higher-than-average demand, is one that will play out over decades, not years. What we are seeing in commodity markets today is a short-term blip, rather than a long-term trend. Most commodity prices have indeed sold off sharply in the course of this year, but this was primarily the result of disruptive short-term price drivers: coronavirus lockdowns in China, aggressive monetary policy tightening in the US, and the energy crisis stemming from the conflict in Ukraine.
However, we foresee the influence of all these pressure factors gradually resolving or subsiding over the course of 2023. Moreover, we view the scale of this sell-off as a market overreaction driven by speculation, which is completely at odds with current state of most commodity markets. We believe that the demand structure for many commodities is undergoing a paradigm shift underscored by the global net-zero transition.
According to the International Energy Agency, to meet the goals of the Paris Agreement, sectors contributing to the green energy transition will be responsible for over 45% of total copper demand, 61% of nickel demand, 69% of cobalt demand, and a staggering 92% of lithium demand by 2040. Such a dramatic increase from the levels of 8-29% at the end of the last decade poses a huge challenge for the supply-side of the market.
The IEA predicts that between 2020 and 2040 global demand for all energy transition minerals will need to quadruple from 7.1Mt to 27.4Mt to meet the Paris Agreement goals. Under a more ambitious scenario of reaching net-zero by 2050, demand for all energy transition minerals would increase sixfold to 43.1Mt by 2030 – including lithium, cobalt, nickel, manganese and graphite, which are crucial for widely used high-performance lithium-ion batteries. Meanwhile, electricity transmission and distribution networks as well as renewable energy generation infrastructure will require significant amounts of copper and aluminium to serve as the backbone for the energy transition.
We believe that in the case of copper alone, the squeeze might only get worse in the near future. S&P estimates that, on average, it takes 17 years to progress a copper mine from discovery to first production – a timeframe that will most likely increase in the coming years due to mounting project development barriers – such as historically poor capital allocation and increasingly stringent ESG requirements, according to Wood Mackenzie, which present challenges to the growth of copper mines projects. At the same time, it is currently estimated that the world would require an additional 0.5Mt of new copper supply annually for 20 years. This is roughly equivalent to building a new Escondida – the world’s largest copper mine – every two years. By 2030, electric vehicles alone will require 1.6Mt of copper, according to the IEA.
At present, visible exchange inventories, including Shanghai bonded copper stocks, have recently slumped to the lowest level on record as of the end of October. They are down by nearly 50% from a year ago and currently stand at less than a third of the average level observed in the preceding five years. Imported copper cathode premiums to China hit all-time highs last month. Year-to-date copper mine production in Chile, the world’s largest producer, is down by 7% YoY – on track for its fourth consecutive year of contraction. These hard facts barely align with current price levels.
This demonstrates that the long-term factors for the energy transition-led commodity supercycle remain intact and any short-term price volatility needs to be carefully reviewed within the broader context.
