Posted on - 01 Mar 2022
OK, so I’m slipping slightly outside the battery materials space here, but I hear and read a lot of rubbish being said/written about both of these metals and I’d like to give my views, which are quite at odds with what much of the sell side is saying. I believe that nickel is likely to be a much better investment story than copper over the course of the next few years and I’ll explain why below.
This is quite a big topic so I’m going to split it into three different blogs:
1) Analysts are overstating copper demand and understating secondary supply potential;
2) Analysts are overstating nickel supply potential, particularly in the near-term;
3) The short-term trends are more bifurcated than you would think.
Before I get lots of hate mail, I’m not saying I’m negative on copper here, but I am laying out an argument as to why nickel should outperform copper substantially over the next several years.
OK, quite a contentious statement, I’m sure you’ll agree.
And there’s probably quite a lot of people that disagree with me. So let me explain where I’m coming from. I want to talk about this in two ways; firstly on a regional basis, and secondly in terms of end uses of copper.
First of all, let’s look at the top line, global copper demand split by region from 2010 to 2019. I’m leaving out 2020 and 2021 because they’re both Covid-affected and we don’t need that muddying the waters.
So, if you look at that chart (below), you’re probably seeing (like me) quite a substantial slowdown in the rate of growth of copper demand after 2014. That’s what really stands out on that chart. Copper demand is still growing, but it’s growing at a substantially slower rate than it was in the early-2010s, and it actually goes slightly below zero in 2019 (although it bounced back in 2020).
So I decided to look at this in a difference way, and break up the contribution to copper demand growth by region. It’s not a surprise that China dominates in terms of demand growth, but I actually want you to look at the regions that aren’t China in this chart. And the point I want to make is, that if you remove China’s contribution to global copper demand, copper demand growth in the world ex-China has actually been negative on average over the 10 year period shown.
I’ll go on to what’s causing that in a second, but (excepting the big spike in Chinese growth in 2020 due to Covid-related issues) China’s growth contribution to copper demand was also significant smaller over the second five years of the period than over the first.
The biggest consumer of basic materials in the world seems to have undergone a structural change in its usage of raw materials in general and copper in particular, and there don’t seem to be a lot of people looking at that.
There have been a lot of column inches in the past 6-12 months written about the slowdown in the Chinese property sector and its impact on copper demand. Some analysts have shrugged their shoulders and suggested that greater infrastructure spending in the Western World should be enough to offset that.
I don’t know what they’re smoking but, from where I’m sitting, it looks pretty potent!
Let’s just talk some numbers here. In 2019, China was 53% of global copper demand, with North America 10% and Europe 14%. According to CRU data, in 2019-20, 22% of China’s copper demand went directly into construction, with an additional 13% going into aircon and 22% into utilities (electrical and water). So lets conservatively say that 35% of China’s copper goes into its construction sector. On 2019 levels, that would be 4.5Mt of copper.
Total copper consumption in 2019 in North America and Europe was 5.8Mt. According to Statista c.21% of copper was used in electrical systems and 43% in construction, so we can maybe estimate that 30% was used in infrastructure and equating this to both regions, that would come out as 1.7Mt of copper.
I think you can see from those calculations that you’d need investments in Western World infrastructure to increase by multiples in order to offset a slowdown in the Chinese construction sector. It just doesn’t add up when you look at the numbers.
So, I’ve already touched on some aspects of segmental demand in the section above. I just want to go into this in a little more detail though because there are good reasons why copper demand has been falling outside China, and why – if China’s fixed asset investment growth continues to slow, or even goes negative – China’s copper demand growth will fall as well or may even turn negative…
Over the past 10-15 years we have seen two major changes in the consumption profile of goods and services:
1) We have seen thrifting of metals in key manufactured goods. In some cases this has come alongside miniaturisation of consumer products such as phones, while in others it just means reduced use of metals in these products;
2) We have also seen a material shift from consumption of goods into consumption of services.
One example of these trends is in the music industry. Since the launch of the iPod in the early-2000s, the way we listen to music has changed substantially. We no longer need recording media such as CDs, we no longer need portable music devices such as CD players and Walkmans and most people just listen to music on their phones. The elimination of the need for portable music playing devices as well as the CDs and tapes themselves has taken away the need for a large amount of materials (mostly metals and plastics). The miniaturisation of mobile phones has also cut down on the amount of metal and plastics used.
And how many houses no longer have installed phones, DVD players and CD players, choosing to use only their mobile phones and TVs linked to broadband or satellite?
These changing behaviours and innovations in technology have resulted in a substantial reduction in demand for metals in consumer products and are one of the most important reasons for the shrinkage of copper demand in regions outside China.
Chinese copper demand growth has remained positive, although the magnitude of that growth has fallen substantially since 2014-15. But the drop in that growth corresponds almost perfectly with a fall in the growth rate of China’s fixed asset investment in 2014-15.
And now it looks likely that China’s rate of growth of property activity could fall more. The Chinese government has become annoyed with the amount of rampant speculation going on in the property market and has looked to cool it. While the cooling tactics are likely to be relatively short term in nature, one is left with the view that China’s property market activity may have peaked. While it will likely come back, we may never see similar rates of growth again.
A lot of analysts are holding out for a stimulus to accelerate copper demand. And while a stimulus may come, it’s more likely to be aimed at the consumer, rather than the construction sector. And that is less likely to have a substantial positive impact on copper demand, given the factors I’ve described above.
One of the reasons that many analysts are excited about copper demand in the medium to long-term is because of the EV event. I’ve lost track of the number of analyst reports I’ve read which suggest that the EV event will be positive for copper demand because your average BEV uses four to five times the same amount of copper as an ICE vehicle.
Unfortunately, that’s simply not true.
Don’t get me wrong, it was true. It was true in 2018 when most EVs were based on ICE models but with added batteries. But since then, as EVs have started to be designed and produced from the bottom up, the amount of copper used in them has fallen significantly. Let’s just recap on the key segments of the vehicle that use copper:
• The battery. In the cell itself copper is used as a current collector for the anode. This means that the anode part of the cell is layered on top of copper foil. Over time the thickness of the copper foil used is being reduced, so this means that less copper is being used in cells than in 2018.
• The battery management system. Battery management systems manage the operation of the different cells in a battery pack for optimal performance. They protect the battery by monitoring its state, controlling its environment and balancing it. Battery management systems help to control thermal runaway and keep the battery operating in non-optimal conditions such as cold weather. Increasingly, battery management systems are going wireless, which is reducing the amount of copper usage. In addition, the move towards larger (and fewer) cells in a battery, as well as module-less batteries means less wiring is necessary. The emergence of LFP, with its better thermal stability, means that less battery management is necessary in LFP-containing batteries. So, usage of copper in the battery management system has declined quite sharply since the first generation of EVs.
• Drivetrain and charging system. Copper is still used extensively in wiring within EVs but many of these applications are similar to ICEs. It is still used in the charging systems but even in these areas thrifting has taken place.
Work done in 2016 suggested that BEVs used c.183lbs (83kg) of copper per vehicle, PHEVs 132lbs (60kg) and ICEs 49lbs (22kg). So BEVs used more than four times the amount of copper. These days most engineers would suggest that BEVs use, on average, about twice the amount of copper as an ICE. And by 2025 this is likely to fall to 1-1.5x. But most sell side houses and newswires are still using the four times figure for at least the next 10 years which, when you’re talking about as many as 30m EV sales by 2030, can make a difference of over 1.2Mtpa of copper to your demand balance.
This could be up to 5% of the current copper market that analysts are overstating long run demand by…
And another thing…not to kick anyone while they’re down, but lets just talk about car sales. Many analyst models are forecasting auto sales to keep on rising. I’m not so sanguine. For starters, it looks like we’re in a decade where high energy prices will be the norm. That will have its own impact on demand for vehicles, but so will the corollary of high energy prices; high interest rates. The majority of cars in the Western World are owned on credit. High interest rates will impact the ability of people to buy cars on credit. And before you say that auto sales in China are still growing, perhaps you’d like to look at the chart below…
It’s not all bad for copper though. There certainly is one major segment of the economy which is going to be positive for copper demand, and it’s the build out of renewable power generating capacity, and the adjacent build out of battery electric stationary storage. The infrastructure required for the renewable energy build out which is due to take place globally will be significant. And it is very intensive in copper.
Indeed, analysis by Visual Capitalist suggests that an average offshore wind development requires 9.6t/MW of copper, onshore wind 4.3t/MW and solar power needs c.5t/MW of capacity.
Given that the world is set to get to over 5200GW of renewable energy by 2030E, that’s presumably going to be a pretty major copper demand event, isn’t it?
Well, yes it is, but the bulk of those additions are back-end weighted, which means that the really substantial capacity additions are due to come on during the last few years of this decade.
For the next 2-3 years we’re expecting c.250GW per year of new renewables capacity. That translates into about 1.7Mtpa of copper. Sounds like a lot? Well, it is on a one-off basis, but the problem is that in incremental growth terms it’s not.
The world added 281GW of renewables capacity in 2020, the equivalent of 1.4Mt of copper. So the incremental growth rate per year is only of the order of 200-300Ktpa of copper in the next few years. It’s just not that significant. Certainly not when we pass it off against the numbers I mentioned earlier for copper demand from China’s construction sector.
All of this unfortunately points to one thing in my view. Copper demand is being overstated by analysts. Most analysts have copper demand growth averaging 2.7% pa out to 2025E. I struggle to get over 1%. Indeed, I struggle to get over 1% CAGR copper demand growth out to 2030, even including demand growth from renewables.
The problem is that many analysts are simply ignoring the structural changes that the copper industry has seen over the past 10 years. The changing nature of consumer products demand for materials, the dominance of services over goods in consumption, the structural deceleration in the Fixed Asset Investment growth event in China and the peaking of auto sales (as well as improvements in technology around EVs which means that less copper is consumed) are all issues that commodity analysts don’t seem to have got their heads around.
There’s also been an important structural change on the supply side as well; the increased usage of scrap in refined copper production. Analysts have routinely over-estimated the magnitude of the supply/demand gap in the copper market in recent years. One of the reasons, as I’ve explained above, is that they regularly overstate demand. But another key reason is that they understate the amount of copper available from recycled material.
According to the International Copper Study Group (ICSG), in 2017 4.1Mt of copper contained in scrap was utilised to produce refined copper. In the following years, up to 2020, with lower prevailing prices, scrap use fell. But should copper prices start to spike again, more scrap is likely to flow into the market. I’m not talking huge amounts here, but a couple of hundred thousand tonnes per year can make the difference between a market being in surplus and in deficit, and that can certainly cap prices on the upside.
Many analysts are forecasting a substantial supply/demand gap in copper over the next five years. Given that consensus is for mine production to rise 4.1% in 2022E and 4.5% in 2023E, I just don’t see it. I think that people are getting too excited about copper and not paying enough attention to nickel. In my next blog I’ll explain why I’m so excited about nickel.
Matt Fernley is Editor of Battery Materials Review and Head of Research for Westbeck Capital’s Volta Energy Transition fund.