Rebuilding in Texas, Florida, and California will consume tons of copper
Copper prices retreated slightly yesterday, but there is little sign that the year-long rally that pushed copper over $7,000/ton last month will slow down. Prices have already risen 23% this year to reach a three-year high. Demand for copper should jump 22% in the next five years solely from growth in the electric car, solar, and wind power sectors, according to Hindalco Industries, one of Asia’s biggest producers of aluminum and copper products.
How does this affect U.S. freight? Arizona is the top American producer of copper, followed by New Mexico and Utah, and the volatile Arizonan mining sector quickly expands and contracts based on global commodity prices. Production, output, and employment are all up on strengthening copper prices. Arizona’s first new copper mine in a decade, Excelsior’s Gunnison Copper Project in Cochise County, is just a permit away from beginning construction. Over all U.S. copper production is up 21% since 2011.
“The key issue for the industry is whether the railroads can supply enough equipment to handle increases in mining production particularly now that the railroads have a long-term focus on coal and intermodal traffic,” said the Arizona Department of Transportation in their multimodal freight analysis study. Flatbed trucking, which has already been on fire this year, should see increases in demand to move copper to port and to feed the American construction industry.
Where will the copper go? George Gero from the Royal Bank of Canada told me, “We look forward to the future re-building of infrastructure in Texas, Florida from weather-related tragedies, as well as fire-damaged areas in California—this may use tons and take copper deliveries for buildings, homes and automobiles as we face next year.”
Although copper is not a major ingredient in electric car batteries—the battery for Tesla’s Model S is mostly nickel and cobalt, while the Nissan Leaf’s battery is manganese—electric motors use huge amounts of copper wiring. A single electric car can contain up to 6 kilometers of copper wire. In terms of weight, a traditional internal combustion engine car uses about 23 kg of copper, while an electric car takes almost double that amount at 40 kg.
Metals prices, including copper, are the biggest cost driver in the automotive industry and directly affect the price of new trucks. Raw materials contribute about 47% of the cost of a new vehicle, and both steel and aluminum are up over the past 6 months. The global transportation sector consumes 12% of the world’s copper supply annually; the construction industry uses 30%.
Chile, the world leader in copper production since the early 1990s, expects only a moderate increase in prices through the remainder of 2017: last month the Chilean Copper Commission predicted an average price of $2.64 per pound for the year, slightly below the average to date of $2.71 per pound.
But some futures traders are betting bigger. Call options wagering on copper climbing above $10,000 a metric ton by December 2018—contracts worth about $4.5M—have started trading during the past two weeks, according to data from the London Metal Exchange. Codelco, a top copper producer in Chile, also forecasts prices above $10,000 a ton by the end of 2018. Copper last traded at those levels in 2011, fueled by runaway demand from Chinese electronics manufacturers. These latest price bounces are being sustained despite Chinese demand, which has fallen as Beijing’s winter anti-pollution program cuts down on refinery and blast furnace production.
The Royal Bank of Canada noted additional headwinds against copper prices in its daily copper comment this morning: “Unfortunately for the bull camp, the copper market was also presented with an 18,198 ton increase in Shanghai copper warehouse stocks and that indirectly speaks of softening Chinese copper demand.”
Some developing nations like India are increasing their copper production to hedge against the prospect of rising prices. This week Mines Secretary Arun Kumar said the government plans to auction off a large number of copper blocks in rural Rajasthan to help control prices for India’s growing manufacturing sector, explaining that relying on imported copper left those industries vulnerable. India currently consumes about 700K tons annually, and the Khetri belts planned for development are estimated to hold reserves of 300K tons.
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