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The Metal Showing Signs of Rust

The Metal Showing Signs of Rust Katusa Research

Copper, the red metal that electrifies our world, is poised for a bullish run.

In last week’s edition, we profiled our bullish long-term copper outlook.

To recap…

EVs’ soaring demand places copper at the forefront, crucial for motors, batteries, and charging infrastructure. Global economic recovery boosts industrial activity and infrastructure spending, supporting copper demand.

Supply constraints, due to labor strikes, declining ore grades, and limited mining investments, have tightened the copper market, potentially driving prices above the current $4 per pound.

Additionally, the green energy revolution increases copper demand for wind and solar installations.

Urbanization in developing nations, particularly Asia, intensifies copper consumption in infrastructure projects.

As these countries modernize, copper’s importance grows.

Despite EV expansion, global economic recovery, supply challenges, green energy, and rapid urbanization, some near-term bearish factors warrant consideration.

The Rust…

The big challenge I see with the copper demand in the short term is the potential for an economic downturn. China has a whole host of problems, as does Europe and North America.

The projections are rosy, but the current economic environment has signs of weakness and will require significant government stimulus across the globe to avoid a hard landing.

Copper Supply – SWAP Line Check

Now with all this demand potential, can the market actually get enough supply?

I’ve written about many times how there is no shortage of copper in the world, but it won’t get it for $3 a pound. This statement remains true today.

  • Higher prices are required to incentivize exploration and development and expansion.

The chart below shows global copper production, separated by +SWAP and –SWAP line nations. SWAP lines refer to agreements between the US Federal Reserve and foreign central banks.

In times of crisis, the Fed can deliver dollars to those central banks. Only a small handful of nations around the world have access to these elusive SWAP lines. Read about my SWAP line thesis here.

Breaking the copper-producing regions into jurisdictions that have access to SWAP lines can provide clues into the stability of a nation.

As you can immediately see, most of the world’s copper comes from -SWAP Line nations. Chile and Peru are the world’s largest producers of copper, and they are not +SWAP line nations.

In addition, there are numerous political and social issues within those 2 key countries (now and in the past).

It is likely that royalty rates and mining taxes are going to go up to appease socialist views in those countries.

Especially with the political force and view of making foreign companies “pay their fair share” for water and environmental protection. And don’t forget an increased standard of living for the workers and social welfare of the community.

Naturally, this is negative for the producer, who sees its profit margins dwindle as foreign government rakes increase.

The Growth Factor

Growth in copper supply is much the same as the current production environment.It is primarily fueled by -SWAP line nations, namely Argentina, Peru, and Chile.

However, there is also considerable growth in high-risk -SWAP line nations like China, Russia, the DRC, Zambia, Papua New Guinea and Argentina, and even Panama which we discuss further later in this report.

The chart below shows the cumulative new supply which could come online over the coming decade. This considers expansion projects as well as development stage assets worldwide.

Forecasting The Global Supply

Now let’s layer all of this into a long-term global supply projection.

The chart below shows current supply broken down into global recycling, +SWAP, and -SWAP Line nation’s current production and future production.

As you’ll see below, most future copper production is not going to come from +SWAP line nations.

Tying it all together…

Below is a chart which shows the copper demand and supply projections under high, low and base case scenarios. These demand projections are plotted against the supply curve derived above.

As you can see, under normal environments we will likely have enough copper throughout the decade, though in later years it is possible that a meaningful deficit arises.

However, what is very difficult to model is the “real world” problems that can and will arise in the short term.

  • Local disruptions and ongoing social challenges
  • Higher costs of capital for exploration, development, and production
  • Higher operational costs
  • Longer permitting times
  • Increased government involvement

Some, or all of these factors will lead to supply restrictions and have the ability to shift the supply curve considerably lower.

What does this mean?

It means that supply is likely to remain tight and that will lead to the world getting more copper, but not for $3 a pound.


Marin Katusa


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