Copper’s critical role in achieving net zero

The road to zero carbon will see an extraordinary build-out of low-carbon electric vehicles (EVs) and renewable power-generating capacity. And as the world reduces its dependence on hydrocarbons, metals will be a linchpin of a zero-carbon economy.

Copper – in the form of wire, cable and foil – will bind and connect the batteries, motors and electrical networks that will help limit the rise in global temperatures. However, the pull on the world’s resources to achieve this structural change will be transformational, dwarfing the demand increases we have seen over the past 30 years.

Wood Mackenzie’s base-case assessment of the energy transition on its current trajectory foresees average global warming of between 2.2 °C and 2.4 °C* by mid-century. Under an accelerated energy transition scenario (AET-1.5), we assume the world will decarbonise over that period to achieve global net zero emissions and limit the rise in temperature to 1.5 °C.

The outcome of our end-use modelling reveals that the likelihood of delivering the copper required to meet future demand shifts from challenging in our base case to improbable in our AET-1.5 scenario. Low-carbon copper demand over the next 20 years would be equivalent to 60% of the current market size.

To meet zero-carbon targets, the mining industry would have to deliver new projects at a frequency and consistent level of financing never previously accomplished. This pathway would result in:
• The need for 9.7 Mt of mine supply over the next decade from projects that have yet to be sanctioned. To date, a shortfall of this magnitude has never been overcome within a decade. This supply gap contrasts with 6.5 Mt under our base-case climate trajectory.
• More than US$23 billion of investment a year in new projects, 64% higher than the average annual spend over the last 30 years.
• A growing market deficit, exacerbated by the sharp increase in refined demand growth. This will underpin a copper price rally to more than US$11,000/t (about US$5.00/lb) within five years, in contrast to US$7,010/t (US$3.18/lb) over the same period in our base case.

In theory, higher prices should encourage project sanctioning and more supply. However, the conditions for delivering projects are challenging, with political, social and environmental hurdles higher than ever.

If primary mine supply struggles to meet future demand, recycling could form part, but not all, of the solution. Investment in the collection, sorting and use of scrap will be required. Lower carbon emissions from recycling will drive a consumer-led preference for secondary copper scrap and could act as a catalyst for investment.

How much copper will be needed?
Close to 80% of copper’s use is related to its property as an electrical conductor. Consequently, future growth in global electricity demand as economies develop will also drive growth in copper consumption. However, the use of copper for EVs and renewable power generation is significantly more intensive than in their fossil-fuelled equivalents. Together with the related build-out of electrical networks, this compounds future expected demand for the metal.

The EV revolution
Electric vehicles will be by far the largest single sector contributing to the rise in green demand for copper over the next two decades, accounting for 55% of green demand.

The premise that copper demand will benefit from the energy transition has already evolved from opportunity to reality. Global EV sales have grown three-fold in three years. Government subsidies in China, the US and Europe have also helped to support greater market penetration. Plants that will provide the copper foil for batteries are being developed apace across Asia, North America and Europe. At least 1 Mtpa of electrodeposited (ED) copper foil manufacturing capacity announcements were made last year alone. These are scheduled for completion over the next few years to meet anticipated demand.

It is the foil in batteries and additional wire for motors that mean a battery electric vehicle can use more than three times the copper of a conventional, internal combustion engine car. The difference is even greater for commercial vehicles.

To put the world on a Paris Agreement net zero pathway, plug-in EV passenger cars will need to account for more than 35% of total vehicle sales by 2025, rising to just under 70% over the subsequent decade. This compares with less than 9% in 2021. It is this higher market penetration of copper-intensive EVs that will fuel additional total copper consumption. Under our AET-1.5 scenario, EV demand for copper will be 40% more than our base-case climate trajectory by 2040. Overall, demand in the EV segment will grow by 9.6 Mt over the next 20 years.

Renewable power generation
As with the automobile market, the decarbonisation of power generation is already underway. Global wind power generation capacity has increased by more than 40% over the past three years. Cable makers such as Prysmian and Nexans are expanding capacity at their North American and European power-cable operations to meet the necessary growth in electrical networks. Rising offshore wind generation targets and upcoming orders will boost copper wire rod demand.

Apart from the wind turbine itself, copper cable is used in to link installations and connect to the onshore grid. Offshore wind farms are, therefore, more copper intensive, thanks to extensive cabling requirements. Copper demand in the offshore segment will grow sevenfold by 2040, even under our base-case scenario. This rises to more than 13 times under our AET-1.5 scenario. Wind power generation will require an additional 1.0 Mt of copper over the next 20 years in a net zero scenario.

The use of copper in solar power generation has just as great an impact as wind. Copper use in solar photovoltaic (PV) plants can be split into two areas. The balance of system (BoS) encompasses all components of a photovoltaic system other than the panels. This includes wiring, switches, a mounting system, one or many solar inverters, a battery bank and battery charger. The solar panel (or module) uses copper ribbons to connect solar cells, held in crystalline silicon.

Copper demand from solar power under the 1.5 °C scenario is estimated at more than double our base case over the next decade, while additional consumption will be 1.1 Mt over the next 20 years under a net zero pathway.

Mine supply: where will the copper come from?
Substantial growth in new mine supply will be needed to meet zero-carbon targets. The industry will have to deliver new projects at a frequency and consistent level of investment never previously accomplished.

The additional volume of copper needed means that 9.7 Mt of new mine supply will be required over the next decade from projects that have yet to be sanctioned – equivalent to nearly a third of current refined consumption. This compares with 6.5 Mt under our base-case outlook, in itself a challenge.

This estimate of new mine supply requirements also assumes a larger contribution of secondary material to meet refined demand. This would require investment in more scrap-processing capacity and a significant increase in scrap availability.

Mineral exploration has unearthed many potential new projects, some with significant identified reserves and resources. In theory, around 17 Mt of annual copper production is in the pipeline – nearly double the volume required to limit warming to 1.5 °C. In practice, some of these projects have not been developed because of poor economics. However, even those that can offer an attractive return on investment have other hurdles to overcome prior to development.

For example, social and environmental licences to operate are proving elusive in major producing countries. So, too, is sufficient infrastructure, including power, water and transport. Project lead times are longer as a result and timing is critical as the race to control climate change gathers pace. We estimate that it can take up to a decade for a major project to be developed from when it is identified.

Investment in traditional mining jurisdictions has faltered in recent times. Uncertainty over the political landscape and fiscal policy has been at the heart of the problem, particularly in Chile and Peru. There are new frontiers with promising mineral wealth – Ecuador and Argentina to name but two – but mining is in its infancy in these countries and progress has been slow. Iran and Russia hold significant reserves but remain closed to outside investment.

As a consequence, we have seen mining project approval rates dwindle to cyclical lows. In the first half of 2022, the volume of committed copper projects totalled an average annual production of 260 ktpa. This is well below the 1 Mtpa required to meet requirements for an accelerated energy transition – and this despite copper prices having been at their highest for a decade.

Furthermore, if we omit those projects in the pipeline that are considered less likely in the near term (‘possible’) leaving those that are more advanced (‘probable’), the volume of copper shrinks to just 2.5 Mt – not nearly enough to cover even medium-term requirements. The implication is that more projects need to be progressed through the pipeline and quickly, or there will simply not be enough primary copper to meet demand, even under a base-case pathway.

What will it cost?
The investment needed to produce a tonne of copper has been rising steadily. The current inflationary environment is one reason, but a more fundamental change is grade decline. The cost of producing a tonne of copper has increased, and projects need to scale up to improve economics, raising the initial capital cost. This means that the list of potential developers is limited to those that can afford the multi-billion-dollar upfront cost.

Assuming an average capital intensity of the project pipeline and taking into account the volume of copper required to achieve climate targets, we estimate that more than US$23 billion a year will be needed over 30 years to deliver new projects. This is a level of investment only previously seen for a limited period from 2012 to 2016, at the back end of the China-induced commodity super-cycle.

There are many impediments to an accelerated energy transition, not least because metal supply chains also need to reduce emissions. There is now a realisation that the world will probably have to burn more fossil fuels initially to bridge the gap. For some commodities, carbon taxes threaten profitability, derailing future investment.

This combination of cost pressures, together with the larger volumes required from an accelerated energy transition, has implications for the industry incentive price. Under AET-1.5, the copper price needed to induce the marginal project to meet demand rises substantially to US$9,370/t (US$4.25/lb) in constant 2022 US dollar terms. In theory, this would be sufficient to close the supply gap and maintain market equilibrium. This compares with US$7,716/t (US$3.50/lb) under a no-carbon-tax and base-case demand scenario.

However, for copper, there is a silver lining, as it were. The metal’s carbon footprint compares favourably with those of many other future-facing commodities. On average, the carbon dioxide emissions from producing copper cathode are a quarter of those of refined aluminium, a potential substitute in certain applications. Furthermore, 70% of copper mine emissions are classified as Scope 2, or relating to power generation. This is something an accelerated energy transition would hope to address by shifting to renewables, significantly reducing the overall carbon intensity of supply.

Scrap: can we close the loop on copper supply?
Copper has an infinite recyclable life. Whether on its own or in alloys such as brass or bronze, it can be reused indefinitely without any loss of quality. These inherent qualities lower its environmental footprint and make it attractive from the social perspective of using more of what has, until now, been deemed waste material or destined for landfill.

Under our AET-1.5 scenario, there is a larger role for scrap in helping to meet future demand. Copper already relies substantially on the circular economy. Over a third of all consumption is derived from secondary sources. We estimate that by 2050, this could rise to 45%, and with higher recycling rates, the contribution could be even more.

Increasing investment in the collection, sorting and use of scrap will help plug the supply gap. However, there are limitations to the speed at which scrap can be delivered in large volumes back to the product cycle. So, under AET-1.5 and in order to achieve 2050 targets, we will need to see higher availability and collection and recovery rates, additional processing capacity and an improvement in the recyclability of products.

Although we expect scrap demand to outpace growth in primary metal, it remains underutilised compared with its overall availability. Why? Because price, profit, quality and technological considerations currently drive the development of the secondary industry.

Any growth in the use of scrap will need to be met by additional policy drivers and more attractive economics. A catalyst for change lies in carbon emissions. A consumer-led preference for greener and more sustainable raw materials should help incentivise greater scrap utilisation. However, recycling alone will not eliminate the need for primary metal.

Conclusion:
time for action
The transition to a carbon-neutral economy presents many challenges. Supplying the raw materials needed to enable decarbonisation in a sustainable way is key among them. So, what action is needed to keep pace with the rate of electrification required to meet Paris Agreement targets?

• Producers and investors: Recognition of the growth opportunity and potential for value creation. Big mining and investors do not want to be stuck in a pre-transition, harvest mind-set, and the risks of delaying investment are rising. It is not only advanced projects that need to accelerate. Exploration and scoping-stage projects throughout the pipeline also need to be progressed. No action will result in higher prices for a short time but, ultimately, demand will be eroded, as will the chance of restricting global warming.

• Governments: Broader recognition of copper’s critical role in decarbonisation and a closer connection between those polices that drive demand – EV subsidies and renewable energy targets – with those that support the supply of the raw materials necessary to achieve them. Key actions include providing clarity for investors on resource policy so that decisions can be made. More generally, support for mine developments by advancing licences to operate will also be needed. From a scrap perspective, policies that support the collection, processing and trade of secondary material are essential.

• Manufacturers and consumers: Manufacturers will need to expect higher costs and build this into consumer pricing. But while copper is essential in many energy transition applications, it is not a major portion of the overall cost for many products – less than 2% for a passenger EV, for example. To mitigate exposure, thrifting is possible and already being explored, particularly in EVs as technology evolves. But outright substitution is unlikely, with no credible alternative in many applications. Vertical integration to secure supply is one avenue not yet explored in the copper sector, but more common in other battery raw materials.

Great strides in the energy transition will continue to be made over the next decade. However, our modelling suggests that the scale and speed of the requirements for copper, a key enabler of electrification, are a stretch. Furthermore, copper is not the only participant in this race. A coordinated investment policy for critical minerals and metals is required if we are to be in with a chance of keeping global warming to 1.5 °C.
Source: Wood Mackenzie