Why Copper’s The New Gold

Why Copper’s The New Gold
Milou Beunk

about 3 years ago4 mins

Mentioned in story

What’s going on here?

The price of copper has climbed 70% since March last year, and given the massive role it's set to play in some of this decade’s biggest investment themes – from China's explosive growth to the rise of the green economy – that might be just the start...

Copper $/metric ton 2016-2021.
Copper’s price has been on a tear recently. Copper $/metric ton 2016-2021. (Source: London Metal Exchange)

What does this mean?

Unlike gold, there’s no shortage of copper in the Earth’s crust – and so the price of the commodity is more straightforwardly driven by supply and demand. Happily for investors, rising demand for copper this year appears likely to coincide with shorter supply.

Let’s start by assessing why demand is expected to be strong. For one, “Doctor Copper’s” many industrial uses – including in construction, machinery, transportation, and infrastructure – mean appetite for the metal is closely linked to worldwide economic activity. While that made for a pandemic-induced slump at the start of last year, vaccine rollouts now leave economic expansion looking imminent.

Countries that are developing rapidly are, unsurprisingly, driving much of the resurgent demand for copper, with emerging markets like China and India responsible for an ever-increasing share. In fact, China accounted for half of global copper consumption in 2019. Even if the rest of the planet’s recovery stumbles, demand should still be solid: the Chinese economy is already there.

The green economy is also expected to contribute to higher demand for copper. Solar panels and wind farms can require up to six times as much copper as fossil fuel plants for power generation, while electric vehicles (EVs) use around four times more copper than gasoline and diesel cars.

Copper use in EVs compared to conventional cars.
Copper use in EVs compared to conventional cars. (Source: Copper Development Association)

As more countries tackle climate change and carbon emissions, renewable energy and EVs are set for much wider adoption – and not just in the West. China, which as we illustrated before is hugely important for copper demand, has vowed to triple wind and solar capacity over the coming decade.

As a result, Trafigura – one of the world’s leading commodity trading companies – predicts renewable energy and EVs will help drive global consumption of copper up from 23 million metric tons in 2020 to 33 million metric tons in 2030.

Supply, meanwhile, looks likely to be tight. Trafigura and investment bank Goldman Sachs expect a shortfall of around 5 million metric tons by 2030, absent increased investment from the mining industry. Such investment will only happen when copper prices are high (and stable) enough to make them profitable, however: around $8,000 to $10,000 per metric ton. This level has only recently been regained.

Even if new mining projects were to begin today, fresh supply won’t reach the market fast enough to prevent a squeeze. It takes at least three years to bring new supply online from existing mines, rising to a minimum of six for entirely new locations. And that’s before you consider all the geopolitical and environmental risks that could easily set back production further.

The upshot? Goldman Sachs forecasts copper supply falling from 2023, with substantial shortages starting as soon as this year.

Copper supply.
Copper supply. (Source: Goldman Sachs)

One potential source of additional supply could be scrap metal: as copper prices rise, people are more incentivized to recycle old wiring and so on the supply of scrap copper. Still, Goldman has already accounted for this extra supply when calculating future shortfalls – saying it should be more than offset by stronger demand.

Why should I care?

Heightened demand from China, renewable tech, and a forthcoming global economic recovery, combined with short- to medium-term supply shortages, may lead to the price of copper surging further. Goldman has set a price target of $9,500 for the end of the year and predicts 2011’s record highs could be surpassed in the first half of 2022. Although prices have already risen in anticipation of all the above, this suggests there’s still a potential 20-30% upside.

But the investment bank also reckons that prices could fall this quarter thanks to increased scrap supply and a seasonal drop in demand around Chinese New Year. Those looking to invest in copper could use this to their advantage, as it may offer a temporarily more attractive entry point.

Copper $/metric ton 2007-2021.
Copper $/metric ton 2007-2021. (Source: London Metal Exchange)

In terms of how to invest, buying physical copper can be a bit cumbersome – while futures contracts are risky, and as a retail investor you might not even have access. An exchange-traded commodity may instead represent a good way to get exposure to copper, with WisdomTree Copper one of the biggest such products out there.

You could also invest in the shares of copper-mining companies like Freeport-McMoRan – the world’s largest independent producer – or First Quantum Minerals. A more diversified way to do this would involve something like the Global X Copper Miners ETF, which tracks 30 such firms. Bear in mind, though, that you’ll be exposed to more than just the copper price: these companies also mine other metals, and you could lose out on the back of poor profits.

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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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