Buyers Are Buying It. Miners Aren’t Mining It. Copper’s A Boom Just Waiting To Happen.

Buyers Are Buying It. Miners Aren’t Mining It. Copper’s A Boom Just Waiting To Happen.
Milou Beunk

almost 3 years ago4 mins

Mentioned in story

This isn’t the first time I’ve written about copper’s rosy prospects, and its price has already surged 25% since then. But there are a couple of reasons that, for my money, the red metal will be the gift that keeps on giving.

Copper $/metric ton 2021.
Copper $/metric ton 2021. Source: London Metal Exchange

Copper’s at the heart of the green economy

Copper is the most cost-effective, conductive metal out there, and it’ll be critical in achieving the goals of the Paris Climate Agreement.

It’ll also be used in much more intensive volume levels in a green economy than in our current one. Just look at electric vehicles (EVs), which need more than five times the copper internal combustion engines do. And that’s not all: it’s the material of choice in everything from charging stations to solar cells, from solar panels to wind turbine generators.

Over the past six months, policymakers around the world have become much more front-footed in designing and implementing green economy policies. That’s led to the dawning realization that an enormous amount of copper is going to be required. Goldman Sachs has been one of the first big investment banks to do a detailed analysis of exactly how high demand will be, and it’s estimated that copper demand from the clean energy transition will grow nearly 600% by 2030.

Copper demand, per year, from green sectors.
Copper demand, per year, from green sectors. Source: Goldman Sachs

… but the copper mining industry isn’t ready

The copper mining industry, meanwhile, has been twiddling its thumbs.

There’s been close to zero investment in new projects for the last decade, because of – among other things – the prospect of poor returns due to low prices for the metal. But even when rising copper prices should’ve been an incentive over the last 12 months, there hasn’t been a single major new copper project approved.

The lack of a response from the copper suppliers has left the copper market very close to peak supply. Consider then that it takes at least two years to extend an existing mine and as long as eight years to ramp up a completely new mining project, and things aren’t going to get better quickly. In fact, Goldman Sachs has estimated that there’ll be a record shortfall of copper over the next decade.

Copper mine supply growth vs copper demand growth.
Copper mine supply growth vs copper demand growth. Source: Goldman Sachs

The booming demand and low supply of the red metal should provide the perfect conditions for copper prices to rise, which should in turn incentivize new mining investments. Goldman Sachs estimates prices could reach an average of $11,875 per ton in 2022 – 19% higher than current levels. But they should really take off mid-decade, hitting $15,000/t in 2025 – 51% higher than current levels.

And I know what you’re thinking: does that take into account the increased usage of scrap metal, as well as the significant uptick in the use of substitute metals like aluminium (even though the physical properties of copper make substitution difficult)? Yes, yes it does.

What’s the opportunity here?

There are plenty of ways you can buy into copper, but they’re not always straightforward.

Buying physical copper is a bit cumbersome, because then you have to deal with storage and shipping. Futures contracts are risky, because you’d probably be trading on leverage, which means your losses could snowball quickly if the market goes against you. A lot of retail investors don’t have access to futures in any case. And while the shares of copper-mining companies like Freeport-McMoRan or First Quantum Minerals are easy enough to buy into, they expose you to the ups and downs of other metals too. Plus, you could lose out on the back of poor corporate management.

So if you want a straightforward investment that gives you complete exposure to the red metal, an exchange-traded commodity – which is similar to an exchange-traded fund, but with a different legal structure – might be your best bet. WisdomTree Copper and United States Copper Index Fund are two of the biggest out there.

Key takeaways

  • Copper will be the most critical material in the transition towards clean energy, which should drive up demand by as much as 600% by 2030.
  • Meanwhile, supply is tight because of underinvestment in copper mining in the last decade, which could lead to a record shortfall in the red metal.
  • Those two factors could push copper’s price higher by 50% in 2025, and the best way to profit from that price rise is by investing in a dedicated copper exchange-traded commodity.
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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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