For years the global trend towards copper has remained the same - declining grades of copper ore because of increased operating costs driving long-term prices higher. Nevertheless, because of advances in technology for miners to compensate for higher costs, there have been waves of decline in copper prices.
Yet, the subject remains: do miners have enticing incentives to achieve higher efficiencies that will push the price down?
Long-term prices driven by costs
Fluctuating supply and demand affects the price of copper, but in the long run the deciding factor depends on the marginal cost of production. That is, the operating and capital costs of producing the metal that would meet demand.
So, what results in marginal costs?
- The decline in ore deposit quality.
- Efficiency achieved in production through the technology used.
There is more than 170 years of history in the way copper has been produced. During the second-half of the 19th century, the economic expansion of the US pushed copper demand and prices up, while the advantages of the Second Industrial Revolution permitted the production of commodities to develop.
The electrification of industrial processes during the early 20th century accompanied earlier advances, leading to one of the most resilient periods in economic development, disrupted only by the world wars. However, these world conflicts prompted advances in supply chains, which spilled over into the raw materials industries.
Since then, the copper industry has remained unchanged until the 1980s, when the implementation of large-scale machinery flourished. The size of cable shovels quadrupled in less than 20 years, while off-highway trucks went from capacities of less than 100 tonnes to more than 300, improving productivity and pushing costs down.
In the mid-80s the spread of SX-EW technology came – originally adopted in some US operations. The process allowed cathode production directly at the mine site at competitive costs. In the last 30 years, however, the downward trend has reversed its path and the influence of macroeconomic effects has been dominant over the relationship between prices and costs.
Real-term cost increases have been because of structural factors – such as grade decline and higher input consumption. These have been somewhat offset by recurring effects – such as favorable input prices, compensating some of the cost rises.
As miners struggle with declining ore quality, the industry faces a challenge of doing business sustainably. These show as additional capital and expenses that must be incorporated into cost structures.
In economic terminology, these costs are referred to as externalities, and the mining industry in the past has been able to insert them into its cost structure, usually through incentives and implementation of regulatory requirements.
The bar has been raised on improving labor practices, occupational health and safety, community relations and environmental management which have been absorbed as additional expenses by mining companies. Despite this, copper has become cheaper to produce.
The expectations for the mining industry to address ESG-related issues only continue to grow. This trend implies that there is a risk to the industry’s costs as environmental improvements are demanded by communities, lawmakers, and investors. I believe stricter environmental policies put risks to the industry’s costs, but at the same time it will encourage miners to transition to cleaner modes of production.
Beyond economic cycles, real copper production costs are expected to increase, assuming no change in the technology and processes that exist today. This will support copper prices in the short- and medium-term. However, this growth in price provides a motivation for miners to shift towards innovative technologies.
For copper to play the role it has been given for in the energy transition, technological developments will need to help narrow the supply gap. While this calls for capital investments and greater risk appetite, the longer term – beyond the green energy transition – may become another wave of new technology that reshapes the cost structure of copper producers.