Source: China Nonferrous Metals Network
Author: Wu Yue, China Metal Mining Economics Research Institute
Introduction: Long-term trends indicate that the shortage of copper resources with economic mining value remains unchanged, and a gap in copper resources will persist beyond 2030 (of at least 3 million tonnes or more). Differences in digital technology among global copper mine producers are beginning to manifest significantly in mining production, leading to a divergence in copper production costs, which may further increase industrial concentration. China, constrained by resource endowment and environmental protection factors, is experiencing a further decline in domestic resource security, resulting in an increased dependence on external copper resources.
Abstract: The next decade will be a challenging and unpredictable one for the world, China, and the copper industry. Global political, economic, and technological variables, including the COVID-19 pandemic, climate change, China-US disputes, digital transformation in mining, and China's environmental governance, will have a significant impact on the global copper industry landscape.
For China, the period from 2020 to 2030 is crucial and arduous, marked by comprehensive and profound structural reforms internally and increasing international competitive pressures externally. Globally, the next decade will also reshape the new economic cycle and dismantle and reorganize the traditional international political landscape. The COVID-19 pandemic, which erupted at the beginning of 2020 and gradually spread worldwide, has had an economic impact far exceeding the 2008 global financial crisis and approaching the severity of the 1930s global economic crisis. As the metal with the strongest financial attributes, the copper market will face an unprecedentedly complex market environment.
The overall impact of the COVID-19 pandemic on the economy is still difficult to define, and there are at least two trends.
Since its discovery in Wuhan, China, in January 2020, the COVID-19 pandemic has gradually spread worldwide, with its duration and scope of impact still uncertain. The spread of the virus and necessary prevention and control measures have had negative impacts on the global economy at various levels.
Firstly, the virus has affected people's normal social activities and consumption, forcing industries such as catering, tourism, and entertainment to temporarily halt operations, and severely impacting the service sector. Secondly, the pandemic has disrupted global trade and supply chains for energy, food, and metals, with copper mine production and transportation in Chile and Peru affected to varying degrees, potentially leading to a shortage of copper concentrate in China in the second half of the year. Thirdly, the pandemic has severely impacted global stock markets, with most markets, except China, experiencing sharp declines. Especially in the US, as a global financial center, due to pre-existing corporate debt bubbles and overvalued stock prices, stock prices plummeted, triggering four rare circuit breakers in succession, and entering a technical bear market despite unlimited quantitative easing by the Federal Reserve. Fourthly, during the pandemic, governments have invested huge amounts of money to combat the virus and rescue the economy, while many people have lost their jobs and sources of income due to the pandemic, meaning that the pandemic has consumed the momentum and consumption potential for global economic recovery.
The overall impact of the COVID-19 pandemic on the global economy depends firstly on its duration and spread, as well as whether there will be a second outbreak similar to the Spanish flu, which the medical community is currently unable to assess and define. In view of this, there are two possible scenarios for the development of the COVID-19 pandemic and its impact on the economy:
One scenario is that countries such as China and South Korea effectively control the pandemic within April, while Europe and the United States can control it by the end of the second quarter, and India and African countries by the end of the third quarter, with the global pandemic basically ending within the year. In this scenario, the global economy avoids a global recession, experiencing a downturn in 2020 but recovering in 2021.
The other scenario is that the pandemic is not effectively controlled in 2020, continuing into 2021 and ending only at the end of the year due to issues such as vaccine availability. In this scenario, the global economy suffers a severe blow, leading to a global economic recession that takes more than three years to recover from.
On April 14th, the International Monetary Fund released its latest global economic forecast, assuming that the impact of the pandemic on emerging economies such as China peaks and eases in the first quarter, while the impact on developed economies in Europe and the United States peaks and eases in the second quarter, with the pandemic's impact ending within the year.
Figure 1: Assumptions about the impact of the pandemic on which the IMF's economic forecasts are based
Data source: IMF
Based on this scenario, the International Monetary Fund (IMF) predicts that the global economic growth rate will be -3% in 2020, followed by a rebound of 5.8% in 2021 on the low base of the previous year. For developed economies, the economic growth rate is projected to be -6.1% in 2020 and 4.5% in 2021. China's economic growth rate is forecasted to be 1.2% in 2020 and 9.2% in 2021. Currently, the IMF report may have overestimated the impact of the pandemic on China's economy while underestimating its impact on other emerging economies and developing countries.
Based on previous copper supply and demand forecasts and with reference to these economic indicators, assuming that the intensity of global copper resource consumption remains unchanged in 2020 and 2021 (the ratio of copper raw material consumption to economic output), and using a weighted calculation of three economies with different resource consumption intensities: China, developed economies, and other countries, we adjust the apparent copper consumption for 2020 and 2021. Our estimates suggest that the COVID-19 pandemic may lead to a 7% decrease in total global copper consumption (electrolytic copper and directly recycled scrap copper) in 2020 compared to 2019. A phased analysis of the pandemic's impact on copper mine supply is complex, as copper companies revise their production plans daily. A recent report by Wood Mackenzie analyzes that the global copper mine supply may contract by at least 5%. The direct impact of the pandemic on scrap copper supply is significant, as it takes at least a quarter for recycling operations to resume. However, this supply can be released later. Assuming that a quarter's worth of recycled copper is substituted by refined copper due to supply disruptions and pricing issues, the stock will be released with a lag over the following years. Overall, our estimates suggest that the impact of the COVID-19 pandemic on copper supply and demand in 2020 results in a surplus of 900,000 to 1,000,000 tonnes.
Climate change impacts the supply side of copper mines and also stimulates new demand for copper consumption.
Global warming poses a major challenge that requires collective action from the entire world, as its long-term threats to human society far exceed those of the COVID-19 pandemic. In recognition of this, governments across the globe have reached a consensus to work together to reduce greenhouse gas emissions.
The direct impact of global warming on the copper industry lies in its water supply issues. Climate change leads to increased variability in numerous hydro-meteorological factors, making droughts and floods more prevalent. Take China as an example; precipitation patterns are changing nationwide, with the traditional "south wet, north dry" pattern gradually shifting. Rainfall in the north is gradually increasing, while it is decreasing in the south, and the pace of precipitation is also altering. Over the past 50 years, the annual average number of rainy days in China has shown an overall downward trend, primarily due to a significant decrease in the number of days with light rain (a decrease of 13%), while the number of days with heavy rain has not decreased but rather shown an increasing trend (an increase of 10%).
For the mining industry, which typically has a development phase of nearly two decades and a production phase lasting several decades or even a century, such changes in precipitation can lead to water supply issues. An increasing number of mines may face water shortages, thereby affecting production.
The core of reducing greenhouse gas emissions lies in decreasing humanity's consumption of fossil fuels. Specific measures include significantly promoting the adoption of renewable energy to replace traditional energy sources and the use of new energy vehicles to replace fuel-powered vehicles. Whether it is wind energy, solar energy, capacitor batteries, or hydrogen-fueled and electric vehicles, they all significantly increase the demand for copper compared to traditional energy sources and vehicles. Taking motor vehicles as an example, traditional motor vehicles use an average of 23 kilograms of copper per vehicle, while plug-in hybrid vehicles and pure electric vehicles use 60 and 83 kilograms of copper per vehicle, respectively.
From a long-term supply and demand perspective, the long-term price of fossil fuels should remain low. Compared to traditional energy sources and vehicles, renewable energy and electric vehicles still have significant gaps in applicability and economy. They require substantial research and development as well as technological innovation. To achieve emission reduction targets, governments need to utilize various fiscal and policy instruments to stimulate the popularization of renewable energy and new energy vehicles, thereby achieving a virtuous development path of government promotion, market expansion, technological innovation, enhanced applicability, and widespread market adoption.
Considering the international community's plans, particularly those of Europe, which is vigorously promoting greenhouse gas reduction, renewable energy and new energy vehicles will achieve considerable substitution by 2030. The corresponding market should enter a rapid development phase by 2025. However, as mentioned earlier, the COVID-19 pandemic has consumed the funds of the international community and the public, which is bound to reduce expected investments in less urgent greenhouse gas reduction efforts. Therefore, the demand for related renewable energy and new energy vehicles will lag by at least one to two years, concurrently affecting the demand for copper.
Represented by the Sino-US trade war, the normalization of disputes between China and the US has been suppressing global economic growth in the long term and affecting the layout of the copper industry chain.
In 2018, the Trump administration initiated the China-U.S. trade war, causing great panic in global financial markets and widespread concerns about the outlook for the global economy, with copper prices plummeting as a result. Subsequently, after repeated negotiations, China and the United States reached a Phase One trade agreement in early 2019, which was well-received by the market.
As a president who rose to power by hyping populism and with a strong sense of being a "businessman," Trump pursued a trade protection policy from the outset of his presidency. During his tenure, he not only imposed trade sanctions on China but also imposed tariffs on traditional allies such as the European Union, Japan, and India. Trump himself does not possess a Cold War strategic mindset. The intention behind his initiation of the trade war was to offset the rising fiscal deficit caused by domestic tax cuts through tariffs, and also to coerce the Democratic Party to loosen fiscal constraints on his administration.
As China's national strength continues to rise, the political elites of both major U.S. political parties have reached a consensus on China strategy in recent years, namely to comprehensively curb China's rapid rise. The strategic orientation towards China has shifted from "competitive cooperation" to "containment," with the trade war being just one strategic means among others. Technology wars, propaganda wars, and subversion wars are all being waged simultaneously. Even during the severe COVID-19 pandemic in the United States, the high-pressure stance of the United States towards China remained unchanged.
The Phase One trade agreement reached between China and the United States earlier can be understood as a "truce" rather than a "final settlement." The China-U.S. dispute will be a long-term issue, and the growth momentum of China and even the world economy will be affected to a considerable degree. Without considering the impact of the COVID-19 pandemic, the development speed of China and the global economy will also be affected, falling below the levels before 2018. Similarly, the development speed of the global copper industry will also be impacted.
The China-U.S. dispute will also affect the layout of the global industrial chain. Some companies that prioritize the U.S. market will be forced to relocate outside China. Some companies in the United States, Japan, and other countries, including some that manufacture copper-containing products, have announced or are considering plans to withdraw from China. These entities hope to transfer some production to Southeast Asia and other locations to avoid U.S. tariffs. As the dispute continues, many companies are looking for alternative production sites for exporting products to the United States, but at the same time, they expect to retain factories in China for the domestic market. Therefore, many manufacturers are likely to establish dual supply chains, which undoubtedly will increase costs and reduce profits. Since China's complete industrial system is irreplaceable, Southeast Asian countries close to China will become the destination for the transfer of related industries. For example, Vietnam is becoming a new base for many electrical and electronic equipment manufacturers from Japan and South Korea.
Although more than 80% of China's copper consumption is domestic, with only a small portion of copper-related exports sold to the United States, the transfer of other industries will undoubtedly weaken the driving force of China's economic development to some extent and ultimately affect domestic copper consumption.
(4) The stability of Western political systems has declined significantly, and both the supply and demand sides of the copper industry will face "high disturbance" impacts.
In October 2019, Chile, the world's largest copper producer with a per capita GDP of $16,000, experienced demonstrations protesting the increase in subway fares from 800 pesos to 830 pesos during peak hours, an increase equivalent to approximately 30 Chinese cents. The protests subsequently turned into large-scale riots and strikes, affecting copper production and transportation. The Chilean peso depreciated by 15% against the U.S. dollar within a month, completely ruling out the possibility of the Chilean government providing financial support to CODELCO, the state-owned copper mining company. A deep analysis reveals that the riots in Chile and the "tweeting president" Trump share a common underlying logic behind the increasing number of "unconventional" political and economic variables in recent years.
Globalization and technological innovation are the main drivers of global economic development. While they bring development to the world, they also exacerbate social inequality. Those who participate, including wealthy individuals, technological elites, and the middle class in emerging economies, benefit from this process. However, the middle class in developed economies and the low-income strata worldwide have not benefited much from this development. Dissatisfaction with the current situation is accumulating, and they are eager for change. To achieve change, they hope to elect anti-establishment leaders or even personally participate in driving change.
Figure 2: Global Population Wealth Growth Curve
Data source: Bank of China Institute
The rapid rise of internet media and social platforms has profoundly altered the landscape of human ideological exchange, exerting an influence on the thoughts of lower and middle-class citizens far beyond that of traditional media. Through the internet, people selectively receive information that aligns with their preferences, leading to the "fragmentation" of societal consensus. Leaders with distinct styles and populist orientations often attract more attention than traditional political elites, while radical and extreme ideas and information are now more easily disseminated and translated into action than ever before.
The essence of Western electoral politics lies in "checks and balances," whose smooth operation requires numerous essential supports, such as a large and rational middle class, mainstream values, politically responsible elites, and media with boundaries. However, globalization, technological innovation, and internet media are weakening these supports to varying degrees, resulting in an increasing number of political and economic upheavals globally, often developing in unexpected directions. The world has entered an era of high "perturbation rates."
Specifically in the copper industry, this high level of perturbation not only affects the consumption side but will equally impact the supply side of copper resources. For resource-exporting nations like Chile and Peru, disturbances to mining production in the coming years may not only stem from miner strikes and disputes with mining communities but also from non-community members using obstruction of mining operations as a means to negotiate with the government for desired rights and interests.
Digital technology is leading a global mining revolution, with production costs for global mining companies gradually diverging.
After the "golden era" of the mining industry from 2002 to 2012 came to an end, the global mining sector began seeking transformation to address new challenges: labor productivity across the industry was continuously declining, while costs were rising. Firstly, ore grades were decreasing. Taking copper as an example, the average grade of copper mines worldwide has dropped by about one-third over the past two decades and continues to decline. Currently, the average grade of copper mines in Chile is close to 0.6%. Based on this, every 0.1% decrease in grade requires a 1.67% increase in workload and energy consumption to produce the same metal tons of copper. Open-pit mines are becoming scarce, and underground mining, which is more costly and has harsher production conditions, will become a trend. With rising global environmental awareness, the mining industry needs to incur higher costs for environmental remediation to reduce its impact on the environment. Additionally, there is a pronounced trend of aging in the workforce, as highly qualified young people are reluctant to enter the industry.
In recent years, the global mining industry has actively attempted to use new technologies, particularly digital technologies, to transform traditional mining in response to these challenges. Digital technologies will drive smarter and more efficient production in mining and make integrated management of the industry chain from mines to ports possible through data integration across the chain. This will enable significant growth in mining production efficiency and value extraction.
Figure 3: The Impact of Digital Technologies on the Productivity of the Mining Industry Supply Chain
Data source: Australian Mining Council report
A digital mining report released by the Australian Mining Council in February 2019 showed that under current technological conditions, the widespread application of digital technologies in the mining industry could provide at least a 9%-23% increase in productivity for the industry. By reducing labor requirements and saving energy, digital technologies will also significantly reduce production costs for mining.
Figure 4: The potential of existing digital technologies to enhance productivity in mining
Data source: Australian Mining Council report
One characteristic of digital technology application is its high initial investment requirement coupled with low-cost replicability. On the one hand, greater investment leads to more advanced system technology and broader coverage. On the other hand, more digital users accumulate more data and experience, resulting in lower average costs, greater optimization benefits, more stable system quality, and faster progress. Consequently, digital transformation often leads to monopolies in data acquisition, storage, analysis, and application, significantly increasing the concentration in related industrial segments.
Global mining giants such as BHP, Rio Tinto, and Vale have actively attempted digital transformation and achieved positive progress. It is expected that by around 2023, punctuated digital technologies such as unmanned transportation systems will be mature and practical, rapidly gaining popularity in the global mining industry. Due to the monopoly characteristics of the digital economy, digital technologies in some areas will gradually spawn a mining digital "third-party" service market worth up to hundreds of billions of USD. Digital operational capabilities will become another key core competitiveness for the metal mining industry, following resources and capital.
In the coming years, the application value of digital technologies is expected to gradually manifest, leading to a differentiation in production costs among global mining companies.
Environmental protection, cost, and other factors constrain recycled copper supply, boosting demand for primary copper.
From 2005 to 2019, the global consumption of copper materials (refined copper + directly reused scrap copper) increased from 21.85 million tons to 28.56 million tons, with an annual compound growth rate of 1.93%; during the same period, the consumption of scrap copper materials (directly reused scrap copper + smelted scrap copper) rose from 7.30 million tons (metallic tons) to 8.43 million tons, with an annual compound growth rate of 1.03%; during this period, the proportion of scrap copper in raw materials gradually decreased from 33% to 30%.
Figure 5, Global Scrap Copper Consumption Trend from 2005 to 2019
Data source: CRU
Theoretically, copper has strong corrosion resistance, a relatively high unit price, and is convenient for recycling. However, in reality, the proportion of scrap copper in metal raw materials has continued to decline slightly, mainly due to the following reasons: Firstly, the cost of scrap copper recycling is not low, with labor and logistics costs increasing year by year. Considerable pollution is also generated during the recovery and separation of recycled copper, posing significant challenges and costs for environmental treatment. When the price difference between refined and scrap copper is low (around 1,500 yuan in China), manufacturers tend to use refined copper instead of scrap copper. Secondly, the recycling rate of copper is not high, averaging approximately 50% globally (slightly higher in China). This means that only about 70% of the copper scrap and copper-containing waste released globally is effectively collected, and only 70% of the collected scrap copper is reused. The reason for such a low recycling rate is the increasing use of copper alloys and the growing complexity of copper-containing products, which significantly increases the difficulty of copper raw material recovery.
Looking at China's situation in 2019, due to environmental and other restrictions, the supply of scrap copper in China decreased significantly that year. Imports totaled 840,000 tons (metal tons, the same below), while domestic production of new and old scrap copper amounted to 1.41 million tons used in production. During the same period, copper consumption (refined copper + directly reused scrap copper) reached 13.3 million tons, with scrap copper accounting for only 17%.
Figure 6: China's Copper Cycle Model in 2019
Data source: WuKuang Research Institute
Although China's scrap copper import supply shortage in 2019 was temporary, and it is expected to significantly improve from 2020 with the shift to importing recycled materials, the global supply of recycled copper is limited in the medium term. The growth rate of scrap copper supply will still be slower than the consumption growth rate. China's scrap copper supply is difficult to increase due to environmental protection factors, thus increasing the demand for primary copper.
Environmental factors have become a key constraint for China's copper industry, and production capacity and output of copper mining and smelting are expected to peak within five years.
China is the world's largest country in terms of population and industrial output, with a high concentration of population and industry in the southeast region, leading to severe environmental overload. Since 2016, China has greatly intensified its environmental governance efforts, with pollution prevention and control becoming one of the core tasks in governing the country. Considering factors such as economic affordability, technological level, and regulatory capacity, China has adopted a strategy of gradually expanding and deepening its pollution control work, following the sequence of "gas first, then water, and finally soil," as well as "power first, then steel, and finally non-ferrous metals." Pollution emission standards have also undergone a gradual improvement process.
Both the non-ferrous metal mining and smelting industries are heavily polluting. In terms of mine pollution, there are several issues: first, the discharge of wastewater from ore dressing and tailings ponds. China's non-ferrous metal mines discharge nearly 200 million tons of wastewater annually (2017 data), with relatively low emission standards; second, the unorganized dust emissions from mining production processes and tailings ponds; and third, the secondary pollution of groundwater and soil by tailings ponds. Residual ore dressing reagents in tailings ponds and acidic wastewater formed through oxidation and leaching can seep into the soil and water bodies around tailings dams, causing severe pollution. This pollution is highly harmful but relatively concealed, making it extremely difficult to treat.
Compared to the coal, power, and steel industries, the total pollution emissions from the non-ferrous metal smelting industry are relatively small but more complex in type. In addition to general pollutants such as water, air, and solid waste, there are also a large number of heavy metals (copper, lead, zinc, etc.) and toxic and hazardous substances (such as arsenic, cadmium, mercury, cyanides), which cause greater damage to the environment and are more difficult to treat.
China has already carried out much work on pollution control in the non-ferrous metal mining and smelting industries, with enterprises investing substantial funds and operational and maintenance costs. However, considering China's extremely limited environmental capacity, current pollution prevention and control efforts are still inadequate and will continue to expand and deepen in the future. China will inevitably adopt the strictest environmental standards to effectively improve environmental quality. Each improvement in environmental standards means a significant increase in enterprises' environmental treatment costs, making China's copper mining and smelting industries bear much higher environmental treatment investment and operational and maintenance costs compared to foreign counterparts. It is foreseeable that the production volume and capacity of China's copper mining and smelting industries will peak and gradually decline in the next five years.
In summary, the global economy and copper consumption in the coming years may be lower than traditional expectations. Based on IMF forecasts, in the short term, copper consumption will drop significantly in 2020, rebound sharply in 2021 from a low base, approaching 2019 consumption levels, and then grow at a low rate from 2022 to 2024. During this period, both copper mine supply and smelting will be in a state of overcapacity. Enterprises will dynamically adjust capacity based on prices and supply and demand to support copper prices, gradually reducing excess capacity. Affected by the pandemic and low prices, the utilization of scrap copper is suppressed, and the substitution of refined and scrap copper and high disturbances at the mine end will partially improve the situation of excess copper mine supply. Global copper raw material supply may end its surplus by 2024, with supply and demand potentially reaching balance (with slightly tight supply) in 2025, and consumption beginning to accelerate. During this period, enterprises related to the copper industry chain will face considerable pressure in production and operation, with a severe external operating environment and high disturbance rates.
In the long term, the trend of shortage of copper resources with economic mining value remains unchanged, and the gap in copper resources will still exist after 2030 (at least 3 million tons or more). Differences in digital technology among global copper mine producers begin to be evident in mining production, leading to differentiated production costs for copper mines, which may further increase industrial concentration. Limited by resource endowment and environmental protection factors, China's domestic resource security rate will further decline, and its dependence on foreign copper resources will further increase.
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