AT A GLANCE
- Electric vehicle sales forecasts pose challenges to copper supplies, with estimates suggesting a possible deficit of 10 million tonnes by 2035
- China is the world’s leading producer and consumer of aluminum, making the country’s COVID-19 policies a major factor in aluminum markets
2022 was a difficult year for base metals as copper lost 35% of its value from its March high to its mid-July low.
Aluminum followed a similar pattern, posting a 31% loss over the same period. Several factors appear to have caused the price drop. Rapidly rising interest rates combined with higher energy prices are fueling concerns about a global destruction of demand. There are also lingering concerns about China as its government mulls easing strict COVID-19 containment policies.
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According to Guy Wolf, Global Head of Market Analytics at Marex, “Demand for copper has fallen, but supply is still very tight, and for the last week or so there has been murmuring about the end of China’s COVID-zero policy It’s $1,000 a ton rise in copper prices in just two days. That’s the level of sensitivity (towards China) that we have.”
Watch: The changing landscape for base and battery metals
Andy Massey, Vice President of Procurement at Bonnell Aluminum added, “China is the largest producer and largest consumer of aluminum, so when something happens in China we all listen.”
Jin Chang, CME Group’s Global Head of Metals, pointed out that “much of the aluminum produced in China tends to be self-consumed. So when it comes to export markets, the US plays a key role as it is a net deficit country in terms of aluminum.”
The three experts provided their comments at the recent OpenMarkets Exchange of Ideas panel, which addressed what had been a volatile year for global metals markets.
Metals in the energy transition
What seems to be front and center in the copper and aluminum markets is the global movement towards green energy and electrification, with many government agencies setting aggressive targets for the transition away from fossil fuels. Both metals are vital in this process, with copper valued for its ability to conduct electricity and aluminum for its strength-to-weight ratio.
As fuel economy standards have risen, reliance on aluminum has also increased, and this trend could increase exponentially with the shift to electric vehicles. Massey pointed out that “our industry used to be excited about getting 300 pounds of aluminum per car, and now some of the EV cars are getting as much as 500-800 pounds of aluminum. So it’s a huge leap for us.” The increased use of copper in electric vehicles is similar, but to a lesser extent.
As demand for electric vehicles and lower-carbon transportation increases, so does demand for key metals such as copper, aluminum, lithium and cobalt.
A standard internal combustion engine vehicle uses 50 pounds of copper compared to an electric vehicle’s 183 pounds. S&P Global Research projects that the US will have a copper deficit of 10 million tons per year by 2035, up from a current deficit of 4 million tons, assuming the electrification trend continues on its current trajectory.
Wolf seemed to have doubts, stating that “Forecasts tend to be wrong, especially when it comes to commodities, and we should never underestimate human ingenuity. If the price of copper goes up too much, we will find new sources or look to the recycling market,” the latter having “a much smaller carbon footprint.” Despite many similarities in the copper and aluminum markets, there are some differences.
Jorge Vazquez, Founder and CEO of Harbor Aluminum pointed out that “the current slowdown in demand is generating excess aluminum, which is becoming more evident over time and poses financial risks to the entire aluminum supply chain,” but Vazquez added, “The geopolitical Situation in Ukraine could become a bigger problem and while I think it’s getting less unsafe at the moment, you never know.”
The uncertainty and volatility in metals has attracted new participants to the CME Group futures markets. The volume of the CME aluminum contract has exploded, increasing by 350% from Q1 to Q3 2022. According to Chang, participants expressed the need to “have a viable alternative market for the base metals industry and we are seeing continued improvement in liquidity so far. We are also seeing development in our battery metals space with a tripling in volume and open interest in lithium and cobalt contracts. ”
Moving forward, most traders seem to agree that the many moving parts in the metals market could cause continued volatility well into 2023.
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