Wednesday February 28, 2024

Is copper the new oil?

August 20, 2023

An energy transition is happening. Moving to a target of net-zero global emissions requires a steady move from fossil fuels to renewable energy, or sources that reduce emissions, while not affecting productivity and output at the same time. An energy transition is an expensive proposition, as economies reconfigure how they source and utilize energy, resulting in complex interplay of supply and demand, resulting in greater volatility in energy prices.

The green transition, the ultimate objective of which is decarbonization, will eventually trigger greater demand for copper, as the world moves from gasoline to electric vehicles, supplemented by establishment in greater numbers of solar and wind power generation units.

Copper with its unique properties of being ductile, as well as electrical & thermal conductivity, is uniquely placed to be used heavily in electric vehicles, as well as in solar and wind power generation equipment. It is estimated that electric vehicles require five times more copper than traditional vehicles (internal combustion engines). As there is greater adoption of electric vehicles, and countries put in place transition plans, the demand for copper is only going to increase further. Similarly, copper is also heavily used in solar panels for improving efficiency, and its intensity will continue to increase as the surge in demand for solar panels continues to increase.

It is estimated that there is approximately 4.5 tons of copper in every megawatt of solar power systems that is established, spread across various components. A transition from on-shore wind to off-shore wind power generation globally will also increase the intensity of copper in wind turbines, further increasing the demand for the same. It is estimated that there is roughly 4.7 tons of copper in every megawatt of wind farm installation that takes place, spread across various components.

Effectively, the transition and adoption of solar & wind power, as well as electric vehicles is going to drive demand for copper as the world decarbonizes. The global demand for copper for green transition is expected to exceed 5.3 million tons by 2030, growing at an average 16 per cent over the next few years as the green transition accelerates. As the demand continues to increase, the supply for copper is expected to remain tight. This is where Pakistan is uniquely positioned to potentially benefit from a surge in copper demand over the next decade as green transition gains traction.

There has been accelerated progress on initiating copper mining at Reko Diq, and operationalization of the same. There exists an opportunity to utilize indigenous resources and add value to the same locally, thereby not just exporting refined copper, but utilizing it to develop local industries to produce, and export value-added products. The current plan of the mine operators is to operationalize the mine at Reko Diq, move the copper concentrate through pipelines, and export it. This is the lowest value-added form of export, as more value would be added outside Pakistan, and at the refining stage, resulting in higher value being captured outside.

Policymakers must consider having in place mid-to-long-term forward integration plans in place. Disregarding this would be a catastrophic failure in not being able to capture the value that can be generated from favourable demand dynamics over the next ten years. There is an argument that copper smelting, and refining cannot be done in Pakistan because of high energy costs. The high energy costs are largely a function of a horribly inefficient transmission and distribution network, and an extractive taxation regime that excessively burdens the electricity consumer, discouraging industrial activity in the process. Relying on the grid to provide affordable electricity is akin to living in a fool’s paradise, and cannot be done without structural reforms across the board.

However, during the last few years, tremendous progress has been made in generating electricity from indigenous coal extracted from the Thar Coalfields. The variable cost of electricity being generated from the Thar Coalfields is in the range of three cents per kilowatt-hours of energy generated. As coal mines scale up, and transition from utilizing diesel as a fuel to electricity, this can be brought down further through a more efficient process.

At these electricity prices, it is possible to profitably run copper smelting and refining operations, effectively capturing all the value that is generated by refining copper through indigenous resources. The prevailing regulatory framework is too rigid and inefficient, and actually discourages industrial activity at this point – it is only through moving towards a more market-oriented structure (rather than a single-buyer structure that currently exists) that we can reduce electricity costs across the board.

Going a step further, ensuring availability and stable supply of copper, it will also be possible to encourage and incentivize development of industries that produce final goods such as electric vehicles, solar panels, etc, in addition to other industries that utilize copper heavily. There is a dire need to have in place the vision to turn the indigenous resources being extracted from Reko Diq and Thar into high-value added finished goods that can be exported, and put the country on the path of sustainable growth. It is also important that communities that have played host to such mineral wealth are treated fairly, and in an equitable manner. Repeating mistakes of the past may eventually result in a future that is also reminiscent of the past.

The global green transition is providing an opportunity to fast-track industrialization through utilization of indigenous resources. Driving market reforms and forward integration across the copper and energy value chain can put the country on a path of industrialization that can provide necessary jobs for the country’s youth, while enabling precious knowledge transfer.

The country is at the cusp of yet another generational opportunity, we can either have the vision for it and build for the future, or we can continue with a myopic view, and keep making the same mistakes we made in the past – and that also includes relying on the same people who have spearheaded the same mistakes time and again every few years.

The writer is an independent macroeconomist.