Despite a global copper market gripped by fears of a shortage, which has propelled prices to record levels and sparked a $49 billion takeover battle, China, the world’s biggest producer and consumer of refined copper, is maintaining production at near-record levels. The country’s expanding copper smelters are defying a scarcity of raw materials by unlocking more scrap metal for processing, thanks to higher prices.

The global copper market has been experiencing a supply squeeze on imports of ore, which smelters use as feedstock. This has led to a collapse in smelters’ fees, prompting them to pledge to reduce capacity. However, these cuts have not materialized, and China’s faltering economy is unable to absorb the excess supply.

Liang Kaihui, an analyst with Shanghai Metals Market, recently explained in an interview that the availability of scrap from discarded pots, pipes, and wires has risen quickly after copper prices surged. Fabricators have been busy turning this scrap into blister, a semi-processed version of the metal, and feeding it back to smelters as a substitute for the overseas ore that is now in short supply. The abundance of scrap is evident in its discount to refined copper, which blew out to 4,615 yuan ($637) a ton last week, the widest in at least eight years, according to SMM.

Despite the oversupply, China’s smelting industry continues to add capacity. Individual firms prefer to defend market share at the expense of margins as long as they remain profitable. Local governments also want smelters to keep churning out metal to meet economic growth targets and maintain employment levels.

The mismatch between supply and demand has become more apparent in recent days, with copper prices retreating to just above $10,300 a ton after reaching a record high of over $11,000 a ton at the start of last week. Although this still represents a 21% gain for the year, it suggests that as long as China remains oversupplied, copper will struggle to make further headway.

In a recent interview with the Financial Times, hedge fund manager Pierre Andurand predicted that copper prices could reach $40,000 per tonne ($18.18/lb) in the next few years due to the increasing electrification of the world. Andurand stated, “We are moving towards a doubling of demand growth for copper due to the electrification of the world, including electric vehicles, solar panels, wind farms, as well as military usage and data centers.”

Similarly, Jeff Currie, former Goldman Sachs executive and chief strategy officer of energy pathways at asset manager Carlyle, told Bloomberg that copper “is the highest conviction trade I have ever seen.” Currie sees copper prices reaching $15,000 a tonne ($6.80/lb).

The demand for copper in the transport sector alone is projected to increase by 11.1 times by 2050, compared to 2022, with electric vehicles containing more than a mile of copper wiring. Additionally, the demand for copper needed to expand the global electricity grid is projected to increase by 4.8 times by 2050, compared to 2022. By 2030, the copper supply gap is projected to approach 10 million tonnes, according to BloombergNEF estimates.

While copper is naturally abundant on Earth, extracting the metal at the pace necessary for an electrified economy could be a challenge. The timeline for bringing a copper mine from discovery to production is lengthy, averaging over 16 years. Top producers like Chile and Peru are facing strikes and protests, along with declining ore grades, while Russia, ranked seventh in copper production, faces an expected decline in production due to the ongoing war in Ukraine.

The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a licensed professional for investment advice. The author is not an insider or shareholder of any of the companies mentioned above.