Unlocking long-term value and the curious case of copper

All asset classes are susceptible to short-term volatility when investors get distracted by macroeconomic and geopolitical developments and lose sight of the big picture.

Copper, along with the broader commodity market, has succumbed to negative sentiment engendered by rising inflation, mounting recession fears, the Russia-Ukraine war and ongoing zero-Covid disruptions in China. After peaking at close to $11,000 per tonne in March 2022, the price of the metal slid by more than a third over the next four months and remained around $7,500 per tonne by the end of the third quarter.^[1]

Despite this bearish performance, analysts, miners and metals traders stress that the market for the oldest metal used by mankind could soon become one of the tightest the world has ever seen, with demand potentially outstripping supply for decades to come.^[2] While acknowledging near-term economic pressures could keep copper prices depressed this year, Goldman Sachs believes these dynamics could see prices double by 2025 to $15,000 per tonne.^[3]

Ignoring the needs of the energy transition

Copper’s tarnished price performance does not reflect its fundamental role in the energy transition, which makes long-term supply of copper a much more pressing concern than the temporary dip in demand. Unless addressed, the looming copper supply gap could short-circuit the energy transition.^[4]

Governments and the International Energy Agency have expressed concern that the supply of copper and other metals and minerals will be insufficient to meet the needs of a move from a fuel-intensive to a mineral-intensive energy system.^[5]

Among those other metals, lithium and cobalt have received the most attention, while copper is often glossed over – even though it is used extensively in electric vehicles, charging infrastructure, solar photovoltaics, wind turbines and batteries. Copper’s conductive properties make it crucial to electrification. The only metal more conductive – though only marginally – is silver, which costs about a hundred times more. Gold ranks third, though is considerably less conductive.

Weak prices will lead to under-investment

The collapse in copper prices puts planned copper mining projects at risk. US-based Newmont Corp has already delayed a decision on a copper and gold project in Peru until 2024. Others are likely to follow, which could have long-lasting effects on global supply chains since getting a new mine up and running can take a decade or more. This will exacerbate the supply crunch for commodities that experts have been warning about for years.

Globally, inventories tracked by trading exchanges are near historical lows and look set to decline further. But China has been bucking this trend in recent months by capitalizing on low prices to steadily increase its imports of copper to replenish its stockpiles. These had recently been drawn down when copper prices had doubled between 2020 and 2021, leading the government and presumably the private sector as well to release copper from their stockpiles to alleviate the financial burden on businesses.^[6]

China sees the opportunity

The China market now appears to be alone in taking a longer view on copper. It is doing this even though its immediate demand for copper has declined because of macroeconomic conditions and the slowdown of its debt-laden property sector.

Beyond the opportunity to restock at favorable prices, China’s hunger for copper is being driven by its booming clean energy sector. Sales of electric vehicles, for example, doubled in August 2022 compared to the same month a year ago. Spending on grid infrastructure is also growing again, and analysts see new green demand for copper more than making up for the waning appetite of old economy drivers such as property.

Of course, China’s ongoing Covid controls are one of the drags on international copper prices. Analysts at ING expect demand for copper to recover when the country recovers from Covid.^[7] And researchers have documented a tendency for commodity prices to “overshoot” in response to macro developments.^[8] When China recovers and the extent of the copper shortfall becomes evident, prices could well overshoot in the other direction.

Taking the long view

Timing the turn in commodities is no easier than it is in equities. But canny investors able to take a long view could well benefit from a widespread underappreciation of copper’s role in the energy transition.

Securities-based financing provides a way for long-term investors to access liquidity and take advantage of short-term market dislocations. As the world heads towards net-zero emissions targets, the implications of the energy transition will present multi-year investment opportunities across a range of asset classes.

As for copper, S&P Global expects the energy transition will double the demand for copper by 2035,^[9] while BloombergNEF believes even a recession would only “delay” demand, leaving its consumption projections up to 2040 largely unaffected.^[10]

[1] https://www.lme.com/en/metals/non-ferrous/lme-copper#Price+graphs

[2] https://www.bloomberg.com/news/articles/2022-09-21/copper-prices-fall-despite-signs-of-looming-crucial-metal-shortage#xj4y7vzkg

[3] https://www.bloomberg.com/news/articles/2022-07-12/goldman-cuts-copper-outlook-as-energy-crisis-threatens-demand#xj4y7vzkg

[4] https://ihsmarkit.com/Info/0722/futureofcopper.html

[5] https://www.iea.org/reports/the-role-of-critical-minerals-in-clean-energy-transitions/the-state-of-play

[6] https://www.reuters.com/markets/commodities/copper-price-slump-brings-chinese-buyers-out-force-2022-09-27/

[7] https://think.ing.com/articles/copper-in-a-soft-patch-but-should-rally-once-china-recovers-from-covid

[8] https://www.nber.org/papers/w1121

[9] https://ihsmarkit.com/Info/0722/futureofcopper.html

[10] https://about.bnef.com/blog/coppers-miners-eye-ma-as-clean-energy-drives-supply-gap/

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