Copper Supply Chains: Trade Tensions and the AI-Driven Demand Surge

The escalating trade friction between the U.S. and China is sending ripples through the copper market, just as artificial intelligence is poised to turbocharge demand for the critical metal.

Supply Chain Fragility

Renewed trade tensions highlight vulnerabilities in the copper supply chain. This comes at a crucial time, with AI advancements, increased defense spending, and the energy transition set to dramatically increase demand.

Matt Chamberlain, CEO of the London Metal Exchange (LME), emphasized that the recent U.S.-China dispute over rare earth minerals holds important lessons. He noted that supply constraints have already pushed spot prices for various metals, including copper, above three-month futures prices. This signals a short-term supply squeeze known as "backwardation," a reversal of typical market expectations.

Demand Drivers

Chamberlain explained that while current price movements are influenced by supply-side disruptions, the long-term outlook is driven by demand. This demand comes from both traditional sectors like air conditioning and construction. It also comes from emerging fields like AI and electrification.

Still, supply chain "fragility" is a key concern, according to Chamberlain. He added that technological advancements impact metals markets in multifaceted ways, influencing daily market dynamics.

Copper's Strategic Importance

Copper is essential for semiconductors, cables, and cooling systems vital to AI. Investors are increasingly focused on copper as the AI sector grows.

“We do need to learn the lessons for copper,” Chamberlain stated. “How do we ensure a diversity of supply? That's really what every nation is looking at, at the moment.”

Securing Copper Supplies

The LME is placing increased emphasis on diversifying delivery locations. Western producers are also discussing reinvesting in smelting capacity. Aurubis, Europe's largest copper producer, is in talks with the U.S. government to potentially build a new copper smelter in the U.S., possibly with government support. The company recently launched a copper recycling plant in Georgia as part of its North American expansion.

That said, environmental standards in the West can be a limiting factor. Chamberlain suggested exploring a “sustainability premium” to incentivize investment in eco-friendly smelting practices.

Projected Demand Surge

Analysis by Wood Mackenzie projects a potential increase in global copper demand of 8.2 million tonnes per year over the next decade. This represents a 24% surge, bringing the total to 42.7 million tonnes per year.

This surge is attributed to the convergence of AI and data centers, increased defense spending, industrialization in India and Southeast Asia, and the transition to EVs and renewable energy. These factors could drive price volatility and amplify demand, potentially pushing total demand growth up by 40% by 2035.

Charles Cooper, research director at Wood Mackenzie, cautioned that copper is becoming a “strategic bottleneck” in the global energy transition. He warned that commodity supply chain disruptions and industry shortcomings could have serious consequences.

“If governments and investors fail to act, we risk turning the metal of electrification into the metal of scarcity,” Cooper said.