Mankind’s love affair with copper dates back to some of our most ancient civilizations, well before written records.
Archaeologists from Haifa University located a copper tool near the Jordan River estimated to be 7,000 years old.
A special metal, the red element could be used directly without the need for processing or later scientific revolutions.
In more recent times, it has assumed a near-hallowed position in modern, industrial societies, due to its many invaluable properties including thermal and electrical conductivity, malleability, and ductility.
It is a key component in various industries such as electronics, wiring, power transmission, construction, transportation, EVs, medical devices, and plumbing and is widely utilized for its anti-microbial aspects.
Approximately 12 months ago, copper prices reached a high of above $10,400 per ton, but at the time of writing were trading at 13.9% below this level.
However, the bull case for copper is still intact and is based on multiple supportive factors.
As mentioned above, copper is used in a variety of industrial, construction and transportation applications.
Dwight Anderson, the founder of Ospraie Management, LLC, notes that although GDP has been on the sluggish side, copper intensity (copper utilized per unit of GDP) is rising, implying that society is shifting to a more copper-dependent way of life.
One of the primary reasons for this trend is the push by virtually all governments for greening the economy including the broad-based adoption of EVs, roll out of charging infrastructure and associated storage options, sustainable logistics, clean transportation, and net-zero grids.
Anderson noted that the switch to these technologies is highly copper intensive,
…you use 23 kilograms…of copper per core in a conventional car combustion engine. In a hybrid car battery, it is 83 kilograms.
In the US, the 2022 Inflation Reduction Act has allotted $370 billion in tax credits and other incentives to de-risk the green energy transition and involve private sector parties.
Such a strategic shift will fuel greater demand for copper, particularly for use in the wiring of distributed grids.
As a result, legislation is a major factor driving the expected demand for copper over the next decade and more.
Communication and data demand
Secondly, the communications sector is rapidly driving growth in copper demand.
This would include the use of batteries and expansion of power grids to electrify 3G, 4G and 5G facilities.
The US Energy Information Administration estimates that electricity consumption in 2024 will be 209 billion kilowatt-hours over and above that of 2020, requiring miles of power cables, network installations, and the use of generators, which are all bullish for copper.
The EU is the global leader in green electrification and harbours a strong culture around energy transition.
In 2022, BloombergNEF estimated that Europe’s net-zero transition strategy would cost a staggering $5.3 trillion.
Each major channel of renewable energy is highly copper-intensive.
Wind energy, for instance, consumes 1.4 tons of copper per MW.
Solar PV installations require 65% more, while offshore wind facilities use more than thrice that volume.
Source: IHS Markit
Moreover, Anderson believes that due to the intermittent nature of renewable power, replacement with traditional energy generation is not on a 1-to-1 basis.
According to his estimates,
…it is over 3 MW of power and related storage…that you need to build to replace one MW of base load.
On the other hand, traditional coal plants usually require less than 1 ton of copper per MW.
Gavekal Dragonomics, a consultancy firm, estimates that China’s demand for copper in 2023 would rise by 3.5%.
Recent positive data from China including an above-forecast improvement in retail sales, higher annual industrial production, and the outperformance of the NBS Manufacturing PMI and Caixin Composite PMI earlier in the month are cause for cheer.
Onshoring supply chains
Other than the drive for green, the pandemic-era stoppages and the Ukraine-Russia war made it abundantly apparent that outsourced supply chains and JIT processes can be extremely vulnerable to sudden disruption.
As a result, major economies such as the US and Europe are looking to create more infrastructure onshore to mitigate risk, particularly as the globe becomes increasingly polarized.
The world has faced a global copper deficit for several years now. The primary force behind this has been the chronic under-investment in mineral operations, and the lack of exploration projects.
In February 2023, the International Copper Study Group estimated the 2022 global shortfall to be about 504,000 tons or roughly 2% of global consumption.
Erik Heimlich, head of base metals supply at CRU expects that by 2030 this deficit could balloon to 4.7 million tons annually.
To complicate matters, the quality of ore is falling in most mining operations, creating a sharp divergence from expected demand.
Chile, Peru and the Democratic Republic of Congo collectively account for 45% of global production.
Each of these countries has faced a mix of internal disturbances, operational inefficiencies, or contractual disagreements, which threaten the stability of output.
A major hurdle for new mining operations is also likely to be the fast uptake of ESG standards, which could slow capital deployment into new projects in already high-rate environments.
As a result, this is the peak in copper production, and even if new projects are launched, it would likely take a decade or more to ramp up supply.
John Ciampaglia, CEO at Sprott Asset Management, adds that prolonged pandemic stoppages have exacerbated labour shortages in some markets.
Inventories and potential for explosive returns
For Anderson, the mix of these factors is the perfect storm for explosive growth in the price of the red metal.
One of his key arguments is due to the critical level of global inventories.
A sea-change in automakers’ strategies to ensure copper security has seen OEMs investing in pre-development stages of mineral projects, implying that they expect considerable EV demand but want sources of raw material under their direct control.
Anderson expects that even a slight improvement in demand combined with near-zero inventory levels, copper prices could be,
…explosive…and it’s off to the races.
We are yet to fully come to terms with the health of the Chinese economy, particularly since much of the recent stimulus packages have not been directed into industrial capacity but other social sectors. Industry watchers will continue to assess import demand in China.
In the West, recessionary forces may dent the business cycle and lead to a decline in copper-intensive production such as for housing or automobiles.
However, due to legislative pressure and the likely easing of rates sometime in the future, this will likely be temporary.
Investors who are long on copper may have to weather such volatility in the coming year.
The energy transition is also bound to create a lot of pressure on local populations which may result in falling support.
With the IMF and World Bank projecting slowdowns in global growth, this may exacerbate conditions on the ground.
Secondly, reports suggest that an increasing base of investors are themselves beginning to question the soundness of current ESG methodologies.
Speaking to Harvard Business Review, an ESG reporting expert Robert Eccles said,
…we would be better off if ESG investing would just go poof.
Thus, the ESG driver may see some dilution, perhaps not immediately but in the years to come.
Lastly, although unlikely at this point, investors should consider the effects of prolonged high interest rates and what this may mean for demand.
The next 6 to 12 months
For the coming year, copper fundamentals are very sound, and Anderson suggests,
…we should see a record price for copper (within the next year).
Goldman Sachs for instance expects copper prices to surge to $12,000 per ton by 2024.
The International Copper Association estimates that at higher prices the substitution into aluminium metal can likely only reach up to 1.3% of overall demand, insufficient to close the copper deficit.
The prevailing structural supply deficit and tight monetary conditions may offer an invaluable buying opportunity for long investors.
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