Investing.com – After the price surge at the beginning of May, the markets are currently experiencing a moderate correction. Amid speculation about future demand increases and supply issues, experts predict high copper prices will become the norm in the long term, despite potential short-term fluctuations. Rodrigo Scolaro, economist at Gep Costdrivers, shared this view in an interview with Investing.com Brazil.
In this context, the electric vehicle sector faces significant challenges due to the rising costs of key metals such as copper, as noted by the expert. Nickel and lithium prices could also increase, further impacting industry costs.
Factors contributing to the recent rise in copper prices include mining disruptions in Chile, Peru, Panama and Zambia, which triggered the price surge. Political developments could maintain these high levels, especially as the balance between supply and demand in China is expected to remain in deficit in the years to come.
Find out the reasons in the full interview:
Investing.com – Copper, crucial to the electric vehicle sector, is near all-time highs. What are the factors behind this price appreciation?
Rodrigo Scolaro – When we talk about the copper market, there are two aspects to consider: the production of ore and the production of refined copper, which would be the most finished product, that is to say the product which is actually traded on international markets.
In recent years, we have seen problems in the mining sector. Copper mining occurs primarily in the Latin American market, with the largest producers being Chile and Peru, but we also have production in several other countries. We saw a wave of political instability and environmental problems in Chile and Peru that hurt mining in those countries, ultimately reducing the supply of ore on the international market.
More recently, the final straw was the closure of a very important mine in Panama, which was the largest copper mine in the country, which precisely affected the supply of copper ore on the international market.
On the other hand, there is the question of refining. China is the major refiner, and as there was less ore on the market, ore was becoming more expensive, putting pressure on Chinese refiners’ margins. They earned less and less for refining.
Discussions among Chinese companies have increased about possible reduction in refining, perhaps reduction, greater control. Some Chinese data indicate that such a reduction has already begun.
As the ore is in trouble, with the Panama mine closing and China discussing the refining issue, there was this uncertainty in the market that the supply of copper is not sufficient to meet demand. , all this coupled with the question of the transition to electric cars and the prospect that demand for copper will increase very soon.
So it was with this fear that prices began to rise. So we have concrete numbers, but this is also a very speculative movement. Regarding refining demand, we saw positive data from the Chinese economy, which is a large demander for refined copper. But today, the main source of demand for refined copper is not yet electric cars. The outlook is that this will be a growing market and perhaps one of the main sources of demand. But today it is China’s construction industry, which is experiencing many demand issues and has seen declines in the real estate sector.
The rise in copper therefore remains somewhat speculative; it is much more a prospect of an increase in demand than a real increase in observed demand. However, in May, it reached historic highs.
Inv.com – Do you think this appreciation will continue? What factors could support or reduce this trend?
Scolaro – After this peak in May, there was a fall in daily copper prices, a price correction of sorts.
So, at this all-time high, since this is a speculative question, it may be a little difficult to maintain the trend. But this fall in prices is not so brutal.
It is very likely that, now in the short term, copper will continue to see a decline, or at least a stabilization very soon at these levels, but it is unlikely that it will return to low parameters like in early 2024 and 2023 .It is clear that we have different scenarios. China is very uncertain. Nothing indicates this, but if there is a very strong real estate crisis in China soon, because it is the main source of demand for copper, this could lead to a fall in prices, precisely with a very drastic reduction in demand .
We can therefore have different scenarios, but what everything indicates is that there will be a supply problem, or at least a delay in this normalization of supply, and that demand will remain as it is. today or will tend to increase.
For prices, if we consider the medium and long term, it is very likely that these historical parameters in price positions will resemble a new normal.
Inv.com – Electric vehicles are particularly affected by these price increases. How do you assess the current supply and demand dynamics in this sector and the potential impact of a significant increase in the price of copper?
Scolaro – There is undoubtedly a direct link. Currently, the construction sector is the main buyer of copper, but the electric vehicle market is a growing market, and an electric vehicle requires a lot of copper. If you compare the amount of copper used in a normal combustion vehicle and the amount of copper used in an electric vehicle, the amount is much greater. In recent years, we have even gained technology to reduce this quantity of copper. If we compare the average kilogram of copper used in today’s vehicles with the electric vehicle of a few years ago, we see that it is much lower. This movement can be explained precisely by copper prices. The industry seeks to use as little as possible. But it is still a metal, as far as our technology is concerned, fundamental to this sector.
With this transition, copper tends to become more and more necessary for this sector and the emerging scenario will have a direct impact. We have several uncertainties, most of them political. In the electric vehicle market, the sector is self-sustaining, but many countries need government incentives precisely to grow persistently. It is therefore a little difficult to predict, in many countries, the extent of demand growth and the speed of the transition.
There are also other factors, such as international governments seeing these metals, not just copper, but also lithium and other metals associated with electric vehicles, as an opportunity to have more liquidity, if the we can say. For example, in Mexico, lithium mines have recently been nationalized. They now belong to the federal government. In Chile, the mining constitution was amended to increase state copper royalties. These are also price-related factors, which may lead to increases.
For Chilean copper, it is expected that the increase in royalties will be passed on in one way or another. These are certainly factors that are expected to impact the electric car market. The perspective is that there will be a gain in technology that will make vehicles cheaper, but the raw materials themselves end up in this political game situation.
The prospect is that this could have an impact on costs, depending on the progress of the opening of new mines, refining rates, but it will lead, in the long term, perhaps to a leveling of profit rates for electric vehicle manufacturers or these costs will ultimately be passed on to the consumer.
Inv.com – China expects electric vehicle costs to fall this year, while the United States plans to increase tariffs on vehicles from China. Which markets could offer new opportunities? Is Brazil one of them?
Scolaro – Electric cars are very dependent on these political issues, but not only that. In Brazil, for example, there has been a strong increase in green energy in recent years, mainly solar and wind, which has benefited from numerous incentives from the federal government.
In the United States, import taxes on electric vehicles have increased sharply, precisely in the context of the current election race between Mr. Biden and Mr. Trump. They both have industry-related protectionist measures, but they are protectionist measures at different levels. Trump has made statements and the history of the Republican Party shows that he is much closer to the oil sector, which could impact some of the incentives for this transition in the United States and make the transition slower towards electric vehicles in the United States. Many market experts indicate that the US electricity sector is already self-sustaining and, even without incentives, will not destroy the industry, but could certainly pose a challenge in the future. transition.
Here in Brazil the difficulty is even greater, because Congress is discussing many incentives for electric energy, not only for electric vehicles, but also for other types of vehicles, such as the green hydrogen. However, this process is too slow to really take off. It’s a little difficult to say exactly what the perspective is. The trend in Brazil is to have more and more electric vehicles, but we have many games of interest, such as ethanol. We see politicians saying we shouldn’t invest so much in electric vehicles, that maybe we should focus on ethanol. The trend is upward, but ultimately it’s a matter of interest plays, making it difficult to predict where the market will go and how fast.
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