Copper, one of the most important industrial metals, plays a vital role in our daily lives and global economy. It is used widely in various applications such as construction, electricity, transportation, and many other industries.
Recently, there has been a lot of buzz about a potential copper squeeze that could have a significant impact on the world markets. This refers to a situation where demand for copper outstrips supply, possibly leading to shortfalls and price increases.
In this article, we will explore what is causing this build-up of pressure in the copper market, how it may affect the global economy, and what you need to know to prepare for it. We will also look at some of the key players involved in the industry, their positions, and possible outcomes.
“Copper is considered an indicator of economic growth because of its broad use in different sectors of the economy.” – Daniel Major
If you’re interested in understanding why this scenario is being talked about so much and whether you should be worried too, read on. An impending copper squeeze has far-reaching consequences, and knowing what’s going on behind the scenes can help you make informed decisions for your business or investments.
What is a copper squeeze?
Definition of copper squeeze
A copper squeeze happens when there is a shortage of copper supply, causing the price to surge due to strong demand from buyers. This phenomenon occurs mainly in the commodity trading market where futures contracts are traded, and it can be caused by many factors such as disruptions in mining operations or unexpected increases in demand.
How copper squeeze works
The way a copper squeeze works is simple: when there is an imbalance between supply and demand, traders start buying copper futures contracts to secure their supply at current prices. As more and more contracts are bought, the demand for copper squeezes the available inventory, leading to shortages in physical supply. The result is a sharp increase in copper prices that benefits those who hold long positions in futures contracts.
If the situation persists and no new supply enters the market, short-term shortages can become long-term ones, which ultimately leads to higher prices and potential economic hardship.
History of copper squeeze
Copper squeeze events have happened multiple times throughout history. One notable example occurred in 1996, when hedge fund manager Andrew Hall executed what is now known as “the mother of all squeezes.” By purchasing large amounts of copper on the London Metal Exchange, he forced prices up and made a profit of over $40 million in six months.
In 2010, another copper squeeze occurred after many years of low investment in the mining industry led to production difficulties. That year copper prices rose by nearly 60%, hurting companies with high exposure to this metal in their supply chains.
Current state of copper squeeze
Currently, we are seeing signs of a significant copper squeeze event happening in the coming years. Many experts predict an upcoming surge in demand driven by the global shift towards clean energy and electric vehicles, which use copper extensively. According to a report by Goldman Sachs, copper prices could reach $15,000 per metric tonne in the near future, significantly higher than current levels of around $8,400 as of July 2021.
“Copper is the new oil,” said Diego Hernandex, head of commodities at Societe Generale. “It’s essential for anything green: wind farms, electric cars, solar panels.”
In addition to high demand, supply is expected to be constrained due to underinvestment in mining and political risks associated with producing countries such as Chile, the world’s largest copper producer. Any event that disrupts mining operations or trade flows could lead to significant upward pressure on prices.
The implications of a great copper squeeze on the global economy
A prolonged copper squeeze would have far-reaching consequences for the global economy because copper is used extensively in construction, infrastructure development, transportation, and electronics manufacturing. A sharp rise in copper prices would make it more expensive for companies to conduct business and pass on costs to consumers, leading to inflation. In addition, shortages in physical supply could disrupt many industries that rely on copper, causing significant economic damage.
There are also potential benefits of a copper squeeze that could drive investment in new mines and increase exploration efforts. Higher prices could attract new players into the industry and encourage existing ones to expand their operations, increasing supply and easing price pressures. Moreover, higher copper prices could ultimately lead to more sustainable production practices and innovations aimed at reducing waste and emissions.
“The renewables transition requires a vast amount of metals, making efficient recycling critical,” -Christoph Heinrich, former director at Greenpeace Germany.
Why is copper important for the global economy?
Copper, a vital metal that has been used by humans for thousands of years, is essential to the functioning of our modern world. From infrastructure development to technology advancement and renewable energy production, copper serves as a crucial element in driving economic growth around the world.
Copper’s role in infrastructure development
Copper plays an integral part in building infrastructures such as power grids, telecommunication networks, and transportation systems. Copper wires and cables are widely used in providing electricity and communication services throughout the world. The high electrical conductivity, durability, and corrosion resistance make copper the preferred choice for these applications.
The demand for copper in infrastructure development has grown significantly over the past few decades. In 2020, the International Copper Study Group reported that approximately half of the total copper consumed was used in construction and utility sectors. In emerging markets like China and India, significant investment in infrastructure projects is boosting demand for copper even further.
Copper’s use in technology and electronics
In addition to its use in infrastructure, copper is also critical to technological advancements. Electronics such as smartphones, laptops, and other computing devices contain small amounts of copper in their components. As the number of electronic devices continues to rise, so does the demand for copper.
Copper’s exceptional thermal and electrical conductivity properties make it one of the primary materials used in microchip manufacturing. According to BloombergNEF, copper consumption in electronics increased by almost 20% between 2010 and 2019, with this trend expected to continue in the future.
Copper’s significance in renewable energy production
Copper is indispensable to the production, storage, and distribution of renewable energy worldwide. Wind turbines, solar panels, and batteries use large amounts of copper in their construction. The ongoing global shift towards renewable energy sources is rapidly increasing demand for copper, which it is expected to become even more prevalent as the world continues to turn away from fossil fuels.
In 2020, the International Renewable Energy Agency (IRENA) reported that copper requirements would continue to grow with the increased deployment of renewables. IRENA estimated that by 2050, copper demand for wind and solar projects alone could reach over 4 million metric tons per year.
“As we transition to a low-carbon future, copper will become increasingly important. It is a key component in everything from electric vehicles to offshore wind turbines.” – Kenneth Hoffman, senior expert at McKinsey & Co.
The upcoming demand rise for copper has already led to a surge in prices, making some experts worry about a “copper squeeze” on the global economy.
The market research company IDC anticipates a significant supply shortage of copper starting in 2022 and continuing through the end of the decade. This shortage results in part from anticipated growth in new applications requiring copper throughout society but not yet accounted for in mine capacity development plans. Demand for copper wire in buildings has been underestimated while electrification in transport may also require large amount of additional production.
The predicted shortfall of this critical metal is a warning sign for all industries relying on copper’s various uses. Economic uncertainty along with concerns surrounding environmental regulation are other factors exacerbating the situation. Whatever happens next, the growing demand for copper serves as a reminder of our continued reliance on natural resources and the challenges they bring.
A Great Copper Squeeze Is Coming For The Global Economy?
Supply chain disruptions
One of the major factors causing a potential copper squeeze is supply chain disruptions. During the pandemic, numerous mines were closed temporarily or operated at reduced capacity due to lockdowns and social distancing measures, leading to supply shortages. Even with some mines reopening, production has been unable to catch up with demand.
In addition, climate-related events such as hurricanes and droughts have caused significant damages to mining operations, further impeding supply. Worse still, logistical issues around transporting the raw metal from producing countries like Chile, Peru, and Indonesia to manufacturing hubs in Asia have created unusual bottlenecks for the supply chain.
“Covid-19 will likely continue to weigh on commodity markets, although many have already started to show signs of recovery. Physical market constraints may also persist,” -IMF report
Increased demand from China and other emerging economies
The fast economic growth of developing countries and particularly China contribute significantly to the increase in demand for copper and other industrial metals. The Chinese government’s plan to boost infrastructure projects and promote electric vehicles sparked a surge in copper imports, creating a staggering 58% rise YoY in November 2020 alone. This trend is expected to continue, especially since analysts predict that more than half of global EV sales by 2030 will be in China.
Besides, rising populations and increasing urbanization levels across emerging economies such as India and Brazil are set to create long-term demand for copper-intensive infrastructure and construction materials.
“China could not exist without African copper. And Zambia cannot survive without its biggest customer.” -Aloysius M. Kasoma, executive director at Mines Safety Department
Insufficient investment in copper mining and refining
Lastly, insufficient investment in copper mining and refining poses a significant threat to the global economy. Although copper is crucial for transitioning to a low-carbon future through its use in renewable technologies such as wind turbines and solar panels, investors have been reluctant to invest in developing new mines. This has resulted in aging infrastructure that often operates at reduced capacity, impacting supply.
The lack of investment also affects technology adoption levels needed to extract copper effectively and cost-efficiently from increasingly lower-grade ores. Investing in automation, digitalization, and energy efficiency is critical to ramping up production and reducing costs.
“Metals related to clean energy like copper are likely to benefit with stimulus measures, leading to higher demand.” -Sunil D’Souza, CEO of Hindalco Industries Ltd
While there seems to be no immediate shortage crisis, it’s essential to take proactive steps towards ensuring sufficient supplies of copper needed for various applications globally. Increased investment in green infrastructure projects, innovation, and digitization would alleviate potential squeeze scenarios while boosting transparency in the metal markets.
How will the copper squeeze affect different industries?
Construction and infrastructure
Copper is an essential component of building materials used in construction and infrastructure projects. The metal’s outstanding electrical conductivity and corrosion resistance make it a preferred material for wiring, plumbing, heating, ventilation, and air conditioning (HVAC) systems, roofing, gutters, and downspouts, among other applications.
The ongoing global pandemic has led to a surge in demand for homes, offices, hospitals, and other commercial buildings equipped with modern amenities like high-speed internet, air filtration systems, and smart home technology. As a result, the construction industry could be one of the hardest hit by the upcoming copper shortage, as prices may rise exponentially due to limited supply. Homeowners who are planning renovations or upgrades that require copper piping, wires, or sheeting may find their budgets stretched thin amid the current economic uncertainty.
“Copper prices have the potential to significantly impact project costs, forcing builders and property developers to look for alternatives such as zinc and aluminum.” -Alexander Smirnov, CEO of TriGranit Construction and Real Estate Development Company.
Technology and electronics manufacturing
Copper is widely used in electronic devices like smartphones, laptops, tablets, gaming consoles, servers, and data centers because of its superior thermal and electrical properties. It is integral to Printed Circuit Boards (PCBs), which connect all of the microchips, capacitors, and resistors together in electronic devices.
The arrival of 5G networks and Internet of Things (IoT) technologies means that the world needs more dense PCBs that can handle heavy traffic without causing lag, buffering, or downtime. With copper prices expected to soar soon, high-tech manufacturers that rely on copper sheets, rods, and foils for their products may face increased costs of production and reduced profits. Companies could also be forced to switch to cheaper, less efficient alternatives such as aluminum or plastic.
“Copper is enabling the increasing use of clean technologies such as electric vehicles, renewable energy sources, and electrified public transportation, which will drive demand for copper even higher over the next decade.” -Steve Forrest, President of Crown Mining Corp.
Renewable energy production
Copper plays a crucial role in the generation, transmission, and distribution of electricity from renewable energy sources like wind, solar, hydro, biomass, geothermal, and tidal power plants. Copper’s exceptional conductivity, durability, and corrosion resistance make it ideal for long-distance power lines that transport electricity across cities, countries, and continents without losing much energy due to electrical resistance.
The world’s transition towards carbon-neutral economies requires huge investments in offshore wind farms, solar panel arrays and other forms of green energy infrastructure, all of which depend heavily on copper wiring and cabling. The upcoming copper squeeze is, therefore, causing alarm bells within the renewable energy sector, where access to affordable, high-quality copper supplies is essential for speeding up green energy deployment worldwide.
“The shift towards more sustainable energy systems means we need much more copper – between five and ten times as much by 2050. Building more renewables and grids using ultra-high voltage cables can’t happen without copper.” -Arnaud Soirat, Chief Executive of Copper & Diamonds at Rio Tinto Group.
Automotive and transportation
Copper’s unique properties are widely applied in various automotive and transportation applications, including radiators, brake discs, hydraulic tubes, connectors, and bearings. Electric vehicles (EVs), buses, trains, trams, subways, and other types of transportation infrastructure all use copper in large quantities due to its high thermal and electrical conductivity.
According to the International Copper Association, an electric car can contain up to 3.6 times more copper than a gasoline-powered car, with most of that copper used in batteries, windings, cables, and charging systems. Any delay or disruption in the supply chain for copper could, therefore, slow down the global shift towards EVs and sustainable transportation systems.
“Without strategic investment in copper mines, we cannot deliver on the expectations placed on today’s mobility revolution.” -Stefan Schlag, Director of Mobility Industry at BMW Group
The great copper squeeze is coming for many industries across the globe. The construction sector may face higher costs and delays if copper becomes scarce or expensive, while technology manufacturers could find their products less profitable without access to cheap copper supplies. Green energy development may stall unless more copper mining projects are initiated soon, while EV adoption rates could suffer from any reduction in copper analytics. These are not just industry-specific issues, but rather significant challenges faced by the entire global economy. Therefore, it’s critical that businesses adopt new strategies and look for alternative materials where possible to mitigate the potential impact of the forthcoming copper shortage.
What are the potential consequences of a copper squeeze?
Copper is an essential material in our daily lives as it is used in construction, transportation, and electronics among other things. However, recent reports suggest that we may be facing a global copper supply crunch due to a combination of factors including labor strikes, factory shutdowns, and increasing demand for green technology.
In light of this impending global shortage, there are several potential consequences that could impact the global economy at large.
Inflation and rising commodity prices
A significant shortage of copper would inevitably lead to price increases which could trigger inflation across several industries. Rapidly increasing prices of commodities like copper will increase input costs and ultimately raise prices on the consumer end due to reduced supply.
“A major bottleneck looks present in global copper supplies,” said Robin Bhar, head of metals research at Societe Generale. “Losing even 10% from any part of the supply chain can create imbalances.”
Furthermore, given that copper is also used in everyday products such as wiring and building materials, an increase in copper prices could potentially increase production costs, reduce disposable incomes, decrease consumer confidence, and contribute to economic instability.
Decreased economic growth and job loss
The availability of copper also affects employment opportunities for many people worldwide. Copper mining provides jobs for millions of people around the globe. The International Labor Organization (ILO) has indicated that over one million mining industry jobs were lost globally during Covid-19, and if another copper boom goes bust, the workforce could face similar challenges.
If the world’s supply of copper significantly reduces or disappears altogether, manufacturing output in developing countries that rely heavily on this valuable metal will plummet. This manufacturing decline may damper economic growth, exacerbating political strife and social unrest.
“Where we have seen disruptions to metals operations, such as with copper mines in Chile earlier this year, there has been a knock-on effect on global supply chains and manufacturing. Supply chain disruption is always bad news for companies,” said Julian Jessop of the UK-based Institute of Economic Affairs think tank.
“Copper is currently seen as the base metal most exposed to an ongoing supply squeeze,” -Wood Mackenzie report
The shortage of copper presents significant risks to industries worldwide. The ramifications are widespread, including job losses, rising commodity prices, reduced economic growth rates, and many other factors that could lead to further economic instability if not adequately addressed. As demand continues to rise globally due to green technology expansion, production cuts, and labor strikes, it is essential to monitor and act proactively on measures that can stabilize the situation.
What can individuals and businesses do to prepare for a copper squeeze?
The global economy is vulnerable to uncertainties that often arise from different vulnerabilities. One such impending issue is the Great Copper Squeeze, which could have significant ramifications around the globe, affecting industries like manufacturing, construction, infrastructure development, electronics, energy, and more. This article will explore what actions both individuals and businesses should take to prepare themselves for this phenomenon.
Diversify investments and portfolios
Diversification is an essential strategy when it comes to investing in commodities or any market. The copper industry is no exception, considering its volatile nature as a result of economic forces. Therefore, having your money spread out across different asset classes would help mitigate losses if copper prices rise dramatically.
Experts have been calling on investors and pension funds to diversify their investment strategies by investing in digital assets like cryptocurrencies. Some cryptocurrencies are modeled on valuable metals supply controls, which makes them less affected by traditional volatility. As Matt Maley, chief market strategist at Miller Tabak + Co, said, “To me, anyone talking about DIGITAL ASSETS (emphasis mine) instead of cryptos or Bitcoin is just trying to put lipstick on a pig, but whatever they want to call things, there will likely be more interest in them in coming years.”
Furthermore, investing in sustainable and renewable energy may also provide insulation against copper shortages in the future as they reduce demand for conventional power sources that utilize high quantities of copper wiring.
Seek alternative materials and resources
Another step that businesses can take is researching and exploring alternative technology and materials to minimize their dependence on copper-based components that are susceptible to pricing volatility. Experts recommend seeking out alternatives such as aluminum, plastics, carbon fiber, and other lightweight materials that are durable and cost-effective options.
Furthermore, seeking alternatives to single-use copper products can also go a long way in reducing their demand. For instance, switching out copper piping for plastic or other suitable materials that are more cost-effective and enjoy a longer lifespan may be an attractive option for companies facing limited supplies in the future.
Reduce waste and increase recycling efforts
The global challenge of meeting increasing demands for essential industries while minimizing environmental harm has heightened the importance of transitioning towards circular economies. The most effective approach would encourage optimization of the use of existing resources and development of renewable systems. This is where recycling comes in, as it helps decrease dependency on primary sources like newly mined copper by providing a secondary supply stream.
“Recycling saves a substantial amount of energy,” said Candace Roulo, editor-in-chief of MMS Online. “It takes 90 percent less energy to recycle aluminum than it does to smelt it from its raw ore.” Extracting metals like copper from recycled items requires considerably less energy compared to mining fresh underground deposits. Thus, encouraging individuals, businesses, and governments to prioritize recycling efforts could help reduce pressure on primary resources.”
The Great Copper Squeeze serves as a wake-up call to investors, consumers, and businesses alike. While we do not know how this squeeze will play out yet, these steps can provide some level of protection against its potential outcomes. With diversification, exploration of alternative technology/materials, and recycling efforts, both stakeholders within and outside the industry can minimize the risks associated with such economic shocks and prepare themselves for a potentially different world economically.
Frequently Asked Questions
What are the factors contributing to a potential copper squeeze in the global economy?
The primary factors contributing to a potential copper squeeze in the global economy include increasing demand from emerging economies, declining copper reserves, and geopolitical tensions that could disrupt supply chains. Additionally, the shift towards renewable energy technologies that rely heavily on copper is also driving demand.
How will a copper squeeze impact industries and consumers around the world?
A copper squeeze is likely to have significant impacts on industries and consumers around the world. Higher copper prices could increase costs for manufacturers and lead to higher prices for consumer goods. Additionally, shortages of copper could lead to supply chain disruptions and delays in the production of critical goods such as electronics and renewable energy technology.
What steps are governments and businesses taking to mitigate the effects of a copper squeeze?
Governments and businesses are taking a range of steps to mitigate the effects of a copper squeeze, including investing in new copper mines, promoting recycling and reuse of copper, and developing alternative materials to replace copper in certain applications. Additionally, some companies are exploring alternative supply chains that rely less heavily on copper and other critical metals.
What investment opportunities are available for those looking to capitalize on a copper squeeze?
Investors looking to capitalize on a copper squeeze may consider investing in copper mining companies or exchange-traded funds that track the price of copper. Additionally, there may be opportunities to invest in companies that specialize in recycling or developing alternative materials to replace copper in certain applications.
What historical precedents exist for copper squeezes and their impact on the global economy?
Historically, copper squeezes have had significant impacts on the global economy, with price spikes leading to inflation and supply chain disruptions. In the 1970s, a copper squeeze contributed to the global recession, while more recently, a 2010 copper strike in Chile caused prices to surge and disrupted supply chains for several months.
What long-term effects might a copper squeeze have on the global economy and geopolitical landscape?
A copper squeeze could have significant long-term effects on the global economy and geopolitical landscape. Higher copper prices could lead to inflation and higher costs for critical goods, while supply chain disruptions could reduce economic growth and stability. Additionally, countries that rely heavily on copper exports could face significant economic challenges, while those that are able to develop new copper reserves or reduce reliance on copper could benefit.