Margin of Sanity Investing Podcast

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The Copper Shortage Explained

Copper and human beings have co-mingled for more than three millennia, and mankind’s need for a steady supply of copper has only ever increased. Over the last 300 years, thanks to accessibility of housing (pipes) and the invention of electricity (wires), human civilization has become entirely dependent on copper for some of its most basic functions. Whether you noticed or not, this sort of growth hasn’t slowed down. If you want to learn about copper in general (as well as copper mining), my deep dive on copper is still available to all readers. Its also available as a podcast.But I’m not going to re-explain all of that to you here. Today I want to talk about the double edged sword currently pushing copper prices above their historical highs, and why I don’t believe this will “correct” in the near future. You see, usually with any commodity, high prices are the solution to high prices. When prices rise too far, suddenly new projects look attractive to investors, and they get funded, built, and produced. This dynamic is as fundamental to a free-market economy as any other. In the long run, this may also be true with copper - though inflation itself tends to lift commodity prices over the long-term in a permanent way (somewhat offset by improved technology/recoveries). Electrification, re-shoring, re-industrialization of Europe/U.S, NATO defense spending, electric vehicles, and AI infrastructure development ALL demand copious amount of fresh copper. But we saw that coming right? Eh. Not really. Not only has the West seriously underinvested in new copper supply, but we’ve also created a permitting environment that puts about a 29-year wait time between discovery and first metal. You may say, “But what about existing mines? Won’t they just ramp production?” Sure, but there’s another problem. You see, when someone builds a copper mine, they usually mine the “best bits” (the high-grade ore) first. The idea is simple: Money now > Money later. Plus, investors and bankers want to get paid back quickly - thats why they call those high-grade areas the “pay-layers.” From the late 80’s to today we’ve seen the reserve grades for copper mines decline by nearly half. In Chile and Peru (the largest copper producers by far), this problem is very evident. Chilean copper mines have experienced these declining average ore grades for a decade - dropping from 0.90% in 2015 to 0.74% in 2023, and are now typically around 0.6% in mature mines. That means for every 1 tonne (2204 lbs) of ore mined, there is only 13 lbs of copper present in the ore. But naturally the actual amount of copper that is recoverable is even less. And since all mines go from high-grade → low grade over time, the increased demand for copper only accelerates the problem. As Chile and Peru struggle to keep the copper flowing, the new “rising star” in the copper production world is…not the best option…The Democratic Republic of the Congo has arisen as a new hot spot for copper (and cobalt) mining. This is all well and good, but would you invest your money in the Congo? From what we’ve seen so far, the answer is, “sure, if you’re Chinese.” China has poured resources into the Congo a while now, in order to secure both the copper and cobalt reserves held within the region. The Congo is not the answer. Besides being effectively a vassal state of China, it is also ripe with its own political instability. Both the political left and the right in America can find fantastic reasons not to rely on the Congo for the nations copper. From optics to national security to just overall common sense, we need a better solution. Besides, the Congo’s copper output has already ramped up. And yet copper prices are still pushing higher and higher.The rise of China is only part of the issue. With a rise in GDP comes a rise in the consumption of energy, consumer electronics, automotive sales, defense spending, and all sorts of other things that fundamentally rely on copper. Considering China’s population and it’s ubiquity in the production/consumption of electric vehicles…we likely have not seen the end in Chinese copper demand.And then there’s India. Much like my “coal bet” write up, where I stated the case for Indian demand of steel-making coal, recycling ain’t s**t when you’re rising out of poverty. Copper is very recyclable. Thats a good thing. But when you have no copper to recycle in the first place it doesn’t mean much. India is going to need electric grids, power plants, and basically everything else that a developed nation requires to function, and all of it will require copper. In the U.S we manage to recycle a lot of scrap copper every year. We can do this because we 1) already mined, processed, and used a heck of a lot of the red metal over the last 150 years, and 2) we have invested a lot of $$$ into the capacity to recycle that copper. The same is true for steel by the way. India doesn’t have much copper to recycle simply because they aren’t “done using” their existing wires and pipes. It takes a while for copper to come offline and be recycled back into the economy. I’m sort of over explaining a simple concept. If you have an existing soda industry, you can recycle the tin into new cans. But if you’re about to grow your soda industry from the ground-up, you need new cans; new tin…new copper. Its a metaphor but I think i’ve made that point (which is self-evident by the way). In the U.S and Europe, we are at the very beginning of a shift towards electrification (guess what that requires) and simultaneously building out this power-hungry thing called “AI.” Not to mention the efforts of the current (and previous) administration to re-industrialize our nation. That means more factories (copper), more power generation (copper), and more power transmission (copper, copper, copper). For the four largest economies in the world, future copper demand is clearly going up and to the right. And where are the mill grades going? Down.Locating high-quality copper deposits is becoming more complex. Mature jurisdictions have already been exploited, deposits are found in more remote and economically challenging areas, or ore grades are declining…..US mines are often a century old with low and declining copper grades: “New supply is needed to replace lost and declining production and meet current and future domestic demand. - Victoria Peacey, president and general manager of the Resolution copper projectHere is yet another part of this story. “Regardless” of healthy exploration budgets, we just aren’t finding a lot of new reserves. And if you’re wondering, “Wait, the U.S is huge and has copper reserves…why can’t we produce it at home?” Allow me to point you to another chart: Mines in the US go from discovery to production in an average of 29 years. 29 YEARS!!!Look, I think of myself as a long-term investor…but 29 years is a bit longer than I care to expose myself to. Permitting. This is the real killer. Not only do local and state governments have a good amount of sway over whether or not a mine can be built (something that adds risk to any investment), but they also take forever to permit even the most environmentally friendly mine. Its no secret that ESG concerns (while often valid) add cost to a mining operation, but the real pain comes from the additional time ESG compliance adds to the investment. I’m not trying to make an arguement here, i’m just pointing out the obvious fact that time = money. We all understand the concept of opportunity cost. Its hard enough to find, drill, engineer, finance, and build a mine. But when you add 29 years to the equation its almost impossible to justify anything besides an incredible discovery. The permitting process in the United States accounts for a large part of this time frame, averaging seven to 10 years and often longer for a number of projects such as the Rosemont copper and Resolution Copper projects in Arizona. S&P Global characterized the permitting process in the United States as a tangled, unpredictable federal permitting process, and said it is made worse by the lack of an office to oversee mining and the development of national mineral resources in the public interest. Many nations, including Canada and Australia have such positions while no comparable office exists in the United States.The report comes amid rising pressure on U.S. officials to streamline what is seen by mining companies and some policymakers as a confusing and lengthy process to obtain a mining permit that harms efforts to offset China’s near-total control of the critical minerals sector. - ReutersWhile there is at least some talk in Washington to shorten permitting times, I don’t believe this will solve the problem in the near term. Even if we reduced regulatory scrutiny to that of the DRC (a move that would prove as surprising as it should be concerning), we would still understandably expect 10 years from discovery to first production. The damage is done. The structural imbalance between supply and demand for copper is not something that was caused by a stroke of a pen, but rather two decades of capital flowing away from domestic copper mining. I expect even an extreme shift in U.S mining policy wouldn’t solve the problem for 5-10 years. And then theres housing. When most people talk about copper demand, they talk about all the things that are currently pushing up prices (AI, electrification, China, India, ect). But they forget about another topic i’ve covered at length here on the Margin of Sanity: Housing. I have a three part series on housing, so if you want to go deep check that out. But here’s the short version. Post-2007 the homebuilding industry in the U.S was devastated. People left, money flowed out, and many builders went out of business. Over the following decade, this slowly but surely left the U.S with too few homes. We’ve under built the housing sector. And then came Covid. Americans were gushing with cash, inflation hadn’t kicked in yet, interest rates were

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