Figure 1: Auto production in H2 2022 forecast

Source: Deutsche Bank estimates

Automakers around the world were forced to cut production during last year, driven by the ongoing shortages of semiconductors, and this in turn has impacted commodity demand, particularly for platinum group metals (PGMs) and aluminium. “After three years of stable volumes, 2020 was the worst year in recent history,” reflect the authors of Commodities Outlook. Hence there was a substantial level of pent-up demand that could have led to strong sales in 2021. However, this was countered by the semi shortage issues that hampered production. As a result, volumes in 2021 were challenged and ended the year flat year on year.” (See Figures 1 and 2.)

Figure 2: Auto sales H2 2022 forecast

Source: Deutsche Bank estimates

More encouragingly, noted the Deutsche Bank Research report DB Global Automotive (8 December 2021), conditions for automakers are positive in the longer term. “Demand is strong, inventories remain tight, EVs are being rolled out and boosting average selling prices, recurring revenue streams develop, distribution models are changing, all of which we see having a smoothing impact on the economic cycle.”

Moreover, adds the report, vehicle electrification is accelerating – particularly in Europe. It points out that new car sales market penetration levels reached 20.5% in Q3 2021 for EVs. This comprises plug-in hybrid electric vehicles (PHEVs) and battery electric vehicles (BEVs) with 11.5% of that for BEVs – doubling overall EV volumes in that 12-month period. “With customers increasingly accepting this drivetrain, infrastructure being improved (22% more charging stations year-on-year in Germany) and over 10 new BEV models being rolled out from EU original equipment manufacturers alone we see this continuing.” The report also points out the effect of large fleets “is still underestimated” and that “more than 50% of premium sales in Germany is fleet business and with CO₂ targets getting tighter corporate fleets quickly move to BEV only”.

With around 600 added gigawatt hours (GWh) of cell capacity per annum announced until 2024 in Europe, the team see EV penetration reaching 70% of the auto market by 2030 in Europe, and if all the proposed capacity does get built, “we even see scope for new car sales in Europe to be close to 100% BEV by then”.

In China, “2021 has already seen a large inflection in passenger car BEV sales and we expect the industry to sell about 2.5 million units (12-13% penetration)”. A proliferation of new models in the mid-tier/mass-market segment will, the team estimates, increase BEV penetration to 40% by 2025.

However, while the US lags other regions globally, “consumer adoption could pick up significantly as more vehicle models become available and if the Build Back Better bill passes through the US Senate”. The bill would introduce an award of up to US$12,500 per EV for union-made EVs using domestically sourced components, compared with the current US$7,500, which would make the vehicles more affordable to a wider market.

The Escondida copper mine in Chile. Source: BHP

“Processing copper from scrap is becoming increasingly important”
Sandra Primiero, Global Head of Natural Resources Finance, Deutsche Bank

With demand for autos expected to pick up for 2022, what does this mean for demand for and supply of copper? The Commodities Outlook forecasts that by 2030, “EVs alone could boost copper demand by around 2.5 million tonnes per annum or 11% of global refined copper demand in 2020 (net effect after factoring in reduced demand from ICEs).

Supply growth has stalled since 2016, but economic recovery from Covid and legacy project approvals will, note the team, increase supply in 2022/23 although supply additions will fall rapidly from 2024 (see Figure 3)

Figure 3: Copper supplies set to fall from 2024

Source: Deutsche Bank estimates, CRU

Several key mining countries have proposed new higher taxation regimes for the mining sector “as nations across the globe look to plug post-Covid budget deficits,” notes the Commodities Outlook, and this factor has impacted copper supplies. Mining taxes are used to fund social programmes as was illustrated in early December when the IMF confirmed in early December there was scope for reform in Peru’s tax system to introduce higher taxes on the key mining sector. Peru is the world’s second largest copper producer after Chile.²

“Higher taxes – and a lack of certainty until new policies are announced – are likely to deter investment”, the report reflects, while noting that in Chile, an onerous increase in royalties and taxes has been proposed but not yet passed. Higher taxes are also being considered by the governments of Brazil, Panama and Zambia. The Deutsche Bank Research team estimates that US$50bn of copper projects slated for an investment decision in the next two to three years could be delayed if uncertainty over taxes continues in the medium term.

In summary, fiscal taxation uncertainty, decarbonisation (uncertainty over future demand and carbon pricing trends), ESG factors (at the corporate and operational levels) and reduced Chinese construction-related demand will, note the team, “keep investment levels contained”.

Processing copper from scrap is becoming increasingly important, reflects Deutsche Bank’s Global Head of Resources Sandra Primiero, as it is less CO₂ intensive to reuse, than to extract and produce from scratch. She explains that the energy mix for processing vital and that (green) hydrogen is set to play a substantial role after 2030 at the latest. By then, green hydrogen “will more more price competitive than grey hydrogen because of CO₂ charges”, says Primiero. “Our clients will need to make substantial modernisation capex investments – and we aim to finance their path towards the energy transition,” she concludes.

Figure 4: Inflation and copper prices have moved in tandem

Source: Bloomberg Finance LP, Deutsche Bank Research

Put simply, when the price of copper rises, demand is up, and the economy is regarded as in growth. When it falls, demand sinks and outputs are cut. In the CRU Group’s article ‘Copper’s inflation ride’, (27 August 2021)⁴ Principal Analyst Craig Lang observed “The copper price has seen a more volatile ride in recent months, following a remarkably steady ascent since its Covid-19 induced low of March 2020.” Lang points out that “global financial liquidity has helped fuel copper’s cyclical recovery against a backdrop of continued supply challenges, a positive secular demand driven by ‘green applications’ and supported by large investments in public infrastructure”. However, he adds, since copper prices reached a record high in May 2021, “inflations concerns have presented headwinds”.

As copper demand exceeds supply this imbalance puts pressure on prices. It goes without saying that rising prices of a fundamental manufacturing input such as copper is an inflationary trend economies could do without as they rebuild after Covid-19 shocks and continue their Net Zero journeys.