Repost: Copper-bottomed

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"If we're going to drill, baby, drill,” Doug Burgum, Secretary of the Interior told an audience at CERAWeek energy conference earlier this year, “then we've got to be asked to also mine, baby, mine."

Burgum may have got his wish after President Trump imposed a 50% tariff on US imports of copper (starting 1st August) in a bid to incentivise domestic production of the metal and reduce America’s reliance on China, the dominant global refiner of copper.

The US produces just over half the refined copper it consumes each year, with more than two-thirds of that copper mined in Arizona. More mines will be developed in the state if the administration gets its wish, although it may be 20 years before a new copper mine actually starts production.

As my article from September 2024 (previously behind the paywall) highlights, low-carbon intensive copper production is increasingly at risk due to drought and heat stress, adversely affecting those mines that rely on hydroelectric power generation.

But perhaps even more concerning for America as it looks to reduce its reliance on imported copper is that climate change could also imperil future production — and here there is unlikely to be any escape from the impact.

Drilling and extracting copper is a highly water-intensive process, and Arizona is among the most acute areas of water scarcity in the country.

“We have said it before – there will absolutely be no energy transition to ‘net-zero’ without a transformational increase in the amount of primary copper produced by the mining industry. However, the inhabitants of our planet are also demanding that mining companies work to limit greenhouse gas emissions and safeguard the environment.”

Robert Friedland, Ivanhoe Mines

Copper demand is set to jump by 72% to 52.5 Mt per annum in 2050, according to projections by BHP, the worlds largest mining group. Outside of traditional sources of growth in emerging economies (i.e., demand for air-conditioning and other appliances), the miner sees decarbonisation and data centres as the key sources of demand growth.1

Transport’s share of copper demand is forecast to double; EV’s are three times as copper intensive as ICE vehicles. Meanwhile, data centre’s share of global copper demand could grow six-fold according to BHP. The burgeoning need for power cables and cooling to support AI development will all mean lots more copper demand.

However, as the second chart from BHP illustrates, copper discoveries are far less common, and when they are found, deposits tend to be much deeper than earlier mines. This means more energy is required to extract the ore, increasing the emissions intensity of the mine, and raising the cost of production. As Robert Friedland, founder of Ivanhoe Mines notes, copper miners are under increasing pressure to cut the emissions intensity of their mines, in turn forcing miners to devote more resources to their existing productive assets.

Copper miners, burnt by previous periods of overexpansion, are also reluctant to invest in new productive assets, fearing the anticipated surge in copper demand might be a one-off. And so rather than invest in additional mining capacity (which can take well over a decade to develop), they seek to gain greater market share. BHP’s recent failed bid to buy Anglo American can be seen in this context. Instead of developing additional copper assets of its own, BHP saw an opportune moment to capture those of one of its competitors instead.

If these dynamics continue to play out over the next decade then the copper market could be set for a severe supply shortfall. Higher copper prices will benefit miners, but if it ultimately hampers the speed of decarbonisation and data centre rollout then manufacturers may then look towards substitute materials.

Copper leading the pack

The copper supply chain (including mining and processing) has reduced its emissions intensity every year since 2020. In contrast, the emissions intensity associated with extracting and refining other energy transition commodities - i.e., nickel, lithium and cobalt - have tended to trend higher, albeit fluctuating significantly on a year-by-year basis (see 'Green' lithium).2

Global mined copper output increased by 378kt between 2022 and 2023, while total mine-site emissions are estimated to have declined by 1.8 Mt CO2e (down 5.3%). Scope 1 emissions (on-site activities) have remained broadly unchanged due to the cost and timescale involved with switching from diesel powered equipment to other technologies. With many copper mines approaching the end of their productive life, miners are reluctant to invest when the opportunity for a return is more limited. In contrast, there has been a significant effort on the part of miners to cut their Scope 2 emissions, i.e., power purchased from the grid.

Many companies have signed Power Purchase Agreements (PPAs) with utilities to supply low carbon power for a substantial proportion of their on-site electricity needs. For example, In 2021 Anglo American PPA with Engie Energia Peru to secure some of the output from its wind farm for its Peruvian copper mining operation at Quellaveco (see Book and claim - Part 1: Energy Attribute Certificates play a vital but controversial role in the energy transition).

Purchased electricity accounts for around 85% of all mine-site electricity consumption according to Skarn Associates. The average emissions per MWh of electricity purchased by the copper industry has been falling an average annual rate of 8.1% between 2018 and 2023. The remaining 15% of a mine’s electricity consumption is self-generated using solar or wind installations.3

The upshot of the decline in indirect emissions is that the emissions intensity of copper has now dropped to ~2.3 tonnes of CO2e per tonne of copper, down from ~3 tonnes of CO2e per tonne of copper before the pandemic, a decline of around one-quarter. However, the prospects for further declines in emissions intensity look limited.

Skarn Associates is expecting copper’s Scope 1 emissions intensity to gradually increase as copper becomes more difficult to extract. Moreover, the decline in Scope 2 emissions is also likely to plateau as miners reach the limits of how much low carbon power they can purchase, and the rate at which the grid decarbonises begins to slow. Indeed, as the next section demonstrates, many copper miners may already be hitting the limit as the impact of climate change begins to be felt.

Scope 2 improvements at risk

The Kamoa-Kakula mine complex, located in Katanga province of the Democratic Republic of Congo (DRC), has the lowest Scope 1+2 emissions intensity of any major copper mine. At 0.16 CO2e per tonne of copper, its emissions intensity is over 90% lower than the global average, and significantly lower than other large copper mining operations.

Kamoa-Kakula achieves its low emissions intensity because of the high ore grade (5.5% versus a global average of 0.6%), and that it’s mine operations are powered by hydroelectric (99.5% of the power supplied to the grid is generated by hydroelectric).

Nevertheless, the Katanga region needs to build far more hydroelectric capacity if Ivanhoe Mines - the owner of Kamoa-Kakula - wants it to remain an ultra low carbon copper producer. Plans to build a huge 40 GW hydropower complex on the River Congo appear to have been revived following decades of delay. If it’s built it will surpass China’s Three Gorges Dam as the worlds largest electricity plant.

Further south, Zambia, the world’s tenth largest copper producer, is suffering from an unprecedented energy crisis. Water levels at Kariba, the world’s biggest man-made reservoir, are so low that the neighbouring hydroelectric facility may have to completely shut-down for only the second time in the dams 65-year history.4

Zambia relies on hydroelectric to supply some 85% of its electricity needs. With the mining industry accounting for around half of the country’s power consumption, copper miners are being forced to source pricier and more carbon intensive electricity from as far as South Africa. The emergency imports are thought to cover at least 20% Zambian mining demand for electricity.

The risk of drought is likely to get worse, and that has big implications for hydroelectric power generation, and by extension the size of copper’s Scope 2 emissions. The share of global copper output exposed to a severe risk of drought is forecast to jump from 7% in 2020 to 40% by 2035, according to analysis by PwC (see Utility player: Climate change threatens hydropower's under-appreciated role in the energy transition).

By 2050 more than half (54%) will be exposed, even in a low emissions scenario. However, in a high emissions scenario, over three-quarters (77%) of copper production will be located in regions at risk of drought by mid-century. Other energy transition metals face a similar challenge. 5

Low carbon edge may not be sustainable

The energy transition and the development of AI infrastructure will not happen without vast amounts of copper. Yet miners face are reluctant to invest given past disappointments and the desire to appease shareholders. Add to that, recent copper discoveries tend to be much deeper underground, and hence more energy and carbon intensive to mine.

This confluence of factors, coupled with demands from customers to improve their environmental performance, has forced miners to decarbonise their mining operations; purchasing low carbon power from the grid, and installing on-site renewable energy capacity.

Low carbon copper mines such as Kamoa-Kakula have a competitive advantage over other more emissions intensive copper deposits. However, their edge is not necessarily sustainable, particularly if climate change results in higher incidence of severe drought, and governments come under pressure to ensure adequate water supplies are available to the general population.

Repost: Aluminium's climate paradox

Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭

Carbon RiskPeter Sainsbury