CNSR SCI 477 - Module 1: Group 10 by Lydia Ashton

News Article Introduction

2024-10-03 17:51:49 UTC

The news article "A missive copper shortage is on the horizon" in The Week, discusses the looming scarcity of copper and its main causes. According to Reuters, copper is "seen as a leading indicator of economic health" since it is used "in homes and in factories, in electronics and in power generation" and many other areas. By 2030, copper mines are projected to only meet 80% of global demand. This projection caused the price of copper shoot to its highest ever, however, strictly caused by investors anticipation. The article then covers the reasons for the looming copper shortage. One of the reasons is because of the misconception that copper is easy to mine. The other main reason is because the demand for copper is surging, partially due to copper's essential role in new energy sources. According to Pippa Stevens, a CNBC market reporter, copper "demand fueled by the energy transition is going to outstrip supply" and there will not be enough of it.

Standard Graph

2024-10-03 18:35:05 UTC

The graph shows the supply and demand at different price and quantity levels for copper. The demand curve represents the increasing demand of copper due to technological innovations in AI, renewable energy, and hybrid vehicles. The supply curve represents the overall supply of copper. Maintaining the copper supply has become more difficult due to the increasing costs and time required of copper mining. Recent governmental and societal concerns about the environment have also leas to increased regulation of copper mining.

Economic Principles

2024-10-03 18:51:31 UTC

Cost-Benefit - With the high prices and risk of producing copper, investors have to decide whether the costs associated with producing more copper is worth the economic growth and innovation.

Opportunity Cost - With copper prices rising to record highs, is the rising price of copper worth purchasing over substitutes such as metal and aluminum. The difficulty of mining copper vs easier products to make such as metal.

Marginal Cost - To what point of producing and investing in copper mines does it lead to an inefficient output of copper and make sense to lower investment.

Interdependence - Is the long term, expensive investment that will be a large commitment. Is the commitment a good investment when there could be technological advancements and new substitutes that revolutionize the market. It takes on average 10-14 years to build a greenfield mines online.

Analysis

2024-10-03 19:03:52 UTC

For demand, the model predicts that as demand rises price will also rise. This prediction aligns with the rise in demand for copper. As demand for copper increases so does the price of copper, this is due to factors including renewable energy and AI.

For supply, the model predicts that if supply were unable to keep up with demand then prices will continue to rise. The predicted model aligns with what is being exhibited in the copper industry. Supply shortages resulting from a lack of efficiency in production, lack of resources, and overall difficulty in copper mining has contributed to this projected change in equilibrium.

Demand Shifts

2024-10-03 19:04:16 UTC

There are a few trends in the economy that led to an increase in demand for copper over the past few years. For one, COVID started an increase in demand. This is due to after COVID ended, it led to a surge in construction, infrastructure investments and transportation. All of these things are copper heavy industries leading to a higher demand. Another reason is the large increase of production for artificial intelligence. Companies like Nvidia and Open Ai need energy intensive computing, which you need copper for. According to the financial times, "AI amounts for less than 1% of copper production currently, but by 2050 it's expected to be 7%."

Supply Shifts

2024-10-04 15:19:37 UTC

The supply of copper has faced significant challenges in recent years due to several factors. Mining companies are struggling to expand production quickly enough to meet future demand, as high-grade copper deposits are becoming harder to find, and the development of new mines typically takes up to 15 years. This lengthy process creates a bottleneck, limiting the ability of supply to adjust to growing needs, especially from industries like electric vehicles and renewable energy. Additionally, inflation and rising operational costs have made it more expensive to build and maintain copper mines, discouraging investment in new projects. Existing mines are also becoming less productive, further constraining supply. As a result, these combined factors lead to a movement along the supply curve, where rising prices incentivize production, but supply remains relatively inelastic in the short run due to the long development timelines and increasing costs.

Market Equilibrium

2024-10-04 16:06:24 UTC

In today's economic context, the equilibrium for copper is being affected by both rising demand and supply constraints. The growing demand from industries such as electric vehicles, renewable energy, and artificial intelligence is pushing the demand curve to the right, increasing the overall quantity of copper needed at every price level. On the supply side, constraints such as the high costs of production, inflation, and the lengthy time required to bring new mines online are causing the supply curve to remain relatively inelastic in the short term. As a result, the new equilibrium is reached at a higher price level, as the increased demand collides with a limited ability to quickly expand supply. This higher price incentivizes existing producers to increase output, but the slow pace of new mine development means the market may face prolonged periods of tight supply and elevated prices before reaching a stable equilibrium where supply and demand meet more efficiently.

Positive Analysis:

2024-10-04 21:36:49 UTC

The current copper shortage is driven by increasing demand due to its critical role in new energy technologies like electric vehicles and renewable energy. However, supply constraints such as high production costs, environmental regulations, and the lengthy process of bringing new mines online have resulted in higher prices. This higher price incentivizes more production, but the market remains tight due to supply inelasticity.

Normative Analysis:

2024-10-04 21:38:18 UTC

The rising costs and environmental concerns suggest that policies should focus on balancing economic growth with sustainability. Investors should weigh the long-term commitment of copper mining against potential advancements in technology or substitutes like aluminum.

Conclusion

2024-10-04 21:42:43 UTC

The current copper mining policy isn't keeping up with rising demand, particularly from renewable energy sectors, leading to inefficiencies. Without changes that expand mining while protecting the environment, these inefficiencies will persist. Higher copper prices make renewable technologies less affordable, hitting lower-income populations hardest. While mining companies and investors benefit from these higher prices, renewable energy companies and consumers are paying more. Communities near mining operations may also suffer from environmental issues caused by increased mining activities.

Article Link

2024-10-04 22:26:28 UTC

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