David Foxwell reflects on the price of copper, offshore wind’s role in driving the price and what higher prices might mean a few years from now
There has been a lot of speculation in the commodity markets and renewable energy sector recently about the price of copper and renewable energy’s role in determining the price. There is a lot more to the price of a commodity like copper than demand from one or two fast-growing sectors, of course: you need to consider the development of new mines, production decline at existing ones, substitution, scrap recovery and supply elasticity. But there is little doubt that demand for copper from wind and solar are relatively new drivers that are set to grow dramatically.
Earlier this year, analysts at BMO Capital Markets released a report looking at the expected impact on global copper markets from two rapidly growing areas: electric vehicles and renewable energy. Its research indicated that renewable energy will be the largest single driver of copper demand growth over the coming years, owing to the need to connect significant numbers of electricity generation units into the grid.
Use of copper to support solar and wind installations is set to grow at a double-digit CAGR over the coming years said BMO, with the former set to add 2.5M tonnes per annum (mta) to global copper demand by 2025 and the latter 1.85 mta. It noted that offshore wind installations are particularly copper intensive.* The onshore wind market is larger in terms of total capacity added annually, but offshore wind is growing more quickly.
Focusing on the period to 2025, BMO’s analysis led to it raising its estimated 2025 copper demand forecast by 1 mta above its previous estimates. Putting this through its models, it said it sees a need for circa 5 mta of new projects from primary mine supply to solve the expected supply gap and bring the market into equilibrium over the 2025-2030 period. It also raised its estimate for the price of copper to US$7,165/tonne in 2018 dollar terms.
In a more recent analysis, Goldman Sachs Group was more sanguine. It said copper bulls might have to wait quite a few years before the global market flips over into meaningful deficits. It based its analysis on the fact that new mine projects are expected to boost output, reducing a deficit that had been projected in 2019, and moving the outlook for 2020-2022 to moderate surpluses and a broadly balanced market.
The dates BMO and Goldman Sachs used in their analyses are telling. BMO looked at the period to 2025; and Goldman Sachs said it only expects a deficit – which could be severe – after 2023. I imagine it could be severe because if you feed forward a little to the mid-2020s, a huge amount of offshore wind and solar is expected to start being built.
Bloomberg New Energy Finance projected that the offshore wind market would grow at a compound annual growth rate of 16% to reach a total global capacity of 115 GW by 2030, a six-fold increase from 2017, but the Institute for Energy Economics and Financial Analysis analysts believe this estimate “possibly understates the enormous offshore wind potential of Asian economies.”
Look at the potential size of the market in the US, and after the initial commercial-scale projects get built in the early 2020s a huge amount of copper could be needed for that market alone, even though early projects are likely to be nearshore, reducing the length of export cables. State-level commitments and advances in permitting and energy offtake processes have seen the US offshore wind project development pipeline exceed 25 GW, according to the US Department of Energy, although, as Navigant argued in a recent report, since copper usage is so closely tied to the installation rate, wind’s role as a growth market in the US could decline in the short-term due to the phase-out of investment tax credits.
To put the potential of the fast-growing US market in perspective, the UK, the world’s leading adopter of offshore wind energy, currently has an installed base of around 7.5 GW (and is planning to build a lot more). UK Round 4 offshore windfarms could see another 7 GW built. Research from Wood Mackenzie suggests the Asia Pacific region’s offshore wind capacity will rise 20-fold to 43 GW by 2027.
BMO said it expects copper demand growth rates through 2030 at above a 3.0% CAGR, marking an acceleration on those seen over the past 20 years. It also noted that the copper project pipeline is ‘historically thin,’ possibly at the lowest level we have seen this century, both in terms of the number of projects and capacity.
In the short term, there may not be a bull market in copper but, I’d argue, firstly, that analyses of demand for copper from wind – and offshore wind in particular – are probably already out-of-date give the extremely fast growth in the industry.
And that secondly, offshore wind energy’s cost base could increase in the mid-2020s, mainly as a result of its own success, as more and more projects are built, in more and more countries, further and further from shore, driving demand for copper upwards as FIDs are taken.
*As the Navigant report prepared for the Copper Development Association in the US and published in Q3 2018 highlighted, copper plays critical roles in wind energy, and not just in demand for inter-array and export cables. There is a lot of copper inside a turbine. Beginning with copper wiring in a wind turbine control system that operates once minimum speeds are present, copper next plays an indispensable role converting a wind turbine’s mechanical energy into electrical energy in the generator. After up-tower power conversion, copper cables transmit electricity from the nacelle to the tower base. As turbines get larger and larger, so the distance between the nacelle and the base of the tower is increasing. In the base of the tower switchgear and step-up transformers – both built with copper components – send electricity to miles of interconnecting copper cables that eventually reach a centralised copper-enabled step-up transformer and substation and are transmitted to the grid.