electric vehicle charging at the side of the road

Lithium receives most of the attention when it comes to electric vehicles, but copper's role is becoming increasingly vital. Australia is positioned to help feed demand.

One of the key steps to reducing our carbon footprint is decarbonising the transport sector. To that end, the world's leading car and truck manufacturers are racing to develop battery-powered electric vehicles (EVs) that will ultimately bring about the end of the internal combustion engine (ICE).

According to the International Energy Agency, EVs comprised 9 percent of total global vehicle sales in 2021 as electric car sales more than doubled to 6.6 million — that's triple their market share from two years earlier.

Australia is no exception — sales in the country tripled in 2021 to 20,665 EVs, up from 6,900 in 2020. Market share came in at 2 percent of all car sales in the nation versus 0.78 percent in 2020, as per the EV Council of Australia.

Overall EV sales are expected to rise to 26.8 million in 2030. This impressive growth in EV adoption represents an opportunity for investors, but also places tremendous pressure on mining companies to keep pace with demand for battery metals such as lithium, cobalt and of course copper. All of these are needed to produce the cars, and perhaps more significantly, the batteries that power them.

Copper's key role in electric vehicles

As mentioned, battery metals like lithium and cobalt are more commonly in the spotlight when it comes to the EV story. But copper has a key role that is only gaining more attention as time goes by.

According to Wood Mackenzie, EVs can use up to three and a half times as much copper as ICE passenger cars. Battery-powered buses, a key aspect of public transportation, are even more copper intensive, using between 11 and 16 times more copper than similar ICE passenger vehicles, depending on the size of the battery and the bus.

Due to its superior conductivity, EVs coming off assembly lines today rely on extensive copper wiring to connect their battery packs to vehicle electronics, while their batteries contain 8 percent copper on average.

What's more, it's estimated that eight times more lithium, nickel and copper will be required for annual EV production in 2030 compared to today — and that is a low forecast assuming only 40 percent EV sales penetration.

Notably, Morgan Stanley (NYSE:MS) has argued that copper is "the new oil" in recognition of how the metal has become an integral component of sustainable technologies as part of a "new industrial order," particularly with respect to EVs and other industrial sectors that rely on clean energy.

Meanwhile, in a May 2021 report, investment bank Goldman Sachs (NYSE:GS) states that "copper will be crucial in achieving decarbonization and replacing oil with renewable energy sources, and right now, the market is facing a supply crunch that could boost the price by more than 60 percent in four years." In addition, the firm predicts that by 2030, copper demand will grow nearly 600 percent to 5.4 million tonnes.

Does this mean that there will be a copper crunch between now and then?

"There is a question mark over whether miners can deliver enough supply for all applications of copper," Eleni Joannides, research director for copper at Wood Mackenzie, explained to the Investing News Network. "If you just consider EVs alone, in most of the world outside China, the extra demand for copper foil for EV batteries will be supplied by scrap. In China, it will be a mix of scrap and refined copper. Even under the most optimistic scenarios, EVs will represent only a small part of total copper demand."

Joannides does not believe that the world's leading EV manufacturers will face a battery shortage owing to a shortfall in copper supply. "It is unlikely that copper in and of itself will threaten battery production given all the other commodities required which have their own supply/demand dynamics. In the meantime, the copper foil industry is making good progress in announcing and building new projects and expansions across the globe."

That said, in the wake of Russia's invasion of Ukraine, along with a projected sustained period of higher oil prices, consumers may shift in even greater proportions away from ICE vehicles and toward EVs. Should prices for copper and the other metals required for battery production continue to soar as they have in recent months, battery manufacturers may pass the costs along to EV manufacturers — their sales figures could be blunted by consequent higher sticker price costs.

Joannides thinks copper will likely rise beyond the three to five year horizon. "This will have to be reflected in battery prices, and this may well affect the profitability of EV battery manufacturers. This could lead to difficulties in the market if EV battery prices become so expensive that EV makers are not prepared to pay for it," she said.

Will copper miners be able to meet demand?

One of the overriding concerns among transportation industry observers is the possibility of future supply chain bottlenecks for global metal producers. Although lithium receives most of the attention when it comes to EV sector commodities, copper is becoming an increasingly vital concern to the industry.

Within the last two years alone, the price of copper has more than doubled from a low of US$2.30 per pound to an all-time record high of US$4.78 at the beginning of March 2022.

Given the stagnation in copper production over the short term compared growing EV sales and corresponding demand for batteries, prices should be expected to stay at high levels and continue to rise over the course of the decade until new mining capacity is created.

However, Wood Mackenzie Principal Copper Analyst Will Tankard argues that copper supply shortage forecasts tend to be exaggerated. "There is always a projected supply gap in the copper market, but it never materialises, either because demand is weaker, or supply is stronger or there is more scrap available," he said.

"Scrap has always played a role as a buffer to the market, and in Wood Mackenzie’s view, scrap is likely to continue to increase its role as another avenue of supply. A look at the copper price signals clearly that the gauntlet has been laid down to the industry to deliver long-term copper production to enable the energy transition. The role of scrap, and thus the availability of scrap into the market, is also developing," added Tankard.

But all that might change as the world emerges out of the COVID-19 pandemic and demand for EVs accelerates. This is especially true in the current climate of rising oil prices, which have skyrocketed past the US$100 per barrel price point in 2022, making the comparative operating costs for EVs far more attractive compared to ICE cars.

This is the view of Bloomberg Senior Metals and Mining Analyst Yi Zhu, who last September said that copper demand will continue to rise in the face of rising demand for EV batteries.

"We think Doctor Copper can get capital boost at oil’s expense, as crude oil is vulnerable to EVs,” Zhu said. "Fuel demand may head for a structural decline while copper consumption could surge as battery power infrastructure develops. And capital could switch from oil-related assets to copper-related assets. The copper/oil ratio has traded above the average resistance level before the pandemic, which implies investor anticipation of a possible post-pandemic shift in both commodities’ price patterns."

How Australia's copper sector can help feed EVs

Rising prices may have the effect of incentivising Australian copper producers to increase exploration, expand capacity and otherwise increase production down the road to meet expected demand for the metal.

According to the most recent data provided by the US Geological Survey, Australian copper reserves are the second highest in the world as of 2021 at 93 million tonnes, behind Chile with 200 million tonnes. Australia is also a top 10 copper producer, and exports generated revenues of US$3.82 billion in 2021; industry analysts expect that figure to continue to rise for the rest of the decade and beyond.

The majority of the country's copper resources are concentrated at the Olympic Dam copper-uranium-gold deposit in South Australia and at the Mount Isa copper-lead-zinc deposit in Queensland.

Other significant Australian copper sources are the Northparkes copper-gold, CSA copper-lead-zinc and Girilambone copper deposits in New South Wales; the Ernest Henry, Osborne and Mammoth copper and copper-gold deposits at Selwyn in Queensland; the copper-zinc deposits at Golden Grove in Western Australia; and the Nifty copper deposit, also located in Western Australia.

For more details on copper in Australia, click through the links below:

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Securities Disclosure: I, Harold Von Kursk, currently hold no direct investment interest in any company mentioned in this article.

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