4 Reasons To Believe In An Upcoming Copper Bull Market
Copper is being touted by some for its investment potential due to macro factors that may be pointing to long term upside in the industrial metal. Often referred to as “Dr. Copper” due to its ability to gauge the health of the global economy, a confluence of factors could be aligning which may portend generally bullish price action in the years ahead. Whether this actually comes to pass is unclear, but TDR unveils 4 factors why a cyclical upswing could be close at-hand.
1. Electrical Vehicle Demand Keeps Growing
According to Copper Development Association Inc., copper is an essential material component of electric vehicles (EVs). It is used in the electric motors, batteries, inverters, wiring and in charging stations because of its durability, malleability, reliability and superior electrical conductivity.
An electric vehicle can use between 85 and 183 pounds of copper, while hybrid and electric buses can contain between 183 and 814 pounds. and copper is also an indispensable component of the infrastructure needed to support electric vehicle charging. To power the EVs of both today and tomorrow, a network of five million charging ports will be needed within the next decade.
Copper holds a well-established reputation as an exceptional electrical metal due to its unique combination of price and conductivity. In fact, it is one of the most conductive metals available, surpassed only by silver, which is much more costly. This advantageous combination makes it a superior choice for various electrical applications.
It efficiently carries electrical currents, minimizing energy loss and facilitating the smooth flow of electricity. This high conductivity is crucial in ensuring the efficient transmission of power across electrical grids, circuits, and wiring systems. This makes the red metal critical for EV power applications.
So if you believe in the long term trend that fossil fuel powered vehicles will be phased out and replaced by EVs, a lasting tailwind in copper demand will result.
2. Supply/Demand Imbalances Building
Market equilibrium between copper supply and demand slowly but surely is increasing. Aging mines, declining ore grades, and environmental regulations pose hurdles to ramping up supply. Limited supply growth coupled with rising demand can create a favorable environment for a copper bull market.
A big part of this equation is twofold: some of the world’s largest copper mines are now in the downside of their production cycles. And lean pricing through the years and decades has lead to low mine development and discovery.
The implications of an impending copper supply shortage are far-reaching, particularly in the context of the energy transition. Copper is a critical component in renewable energy infrastructure, electric vehicles, and emerging technologies. Therefore, any disruption or shortfall in copper supply could hinder the progress of these sectors, impacting global efforts to reduce carbon emissions and transition to a more sustainable future.
The most effective way to remedy increasingly dislocated supply imbalances is through higher copper prices, as this will incentivize exploration along the curve. But with prices below $4/lb currently, incentivization will probably remain in short supply until a material change in price dynamics.
3. Decreasing Copper Inventories
This is highly correlated with the reason above, with time lag, Inventories of copper held in exchanges and warehouses have been declining, indicating tightening supply conditions. Lower inventories often correlate with higher prices, as it suggests a greater balance between supply and demand.
Case in point: inventories at the London Metal Exchange—a primary hub for copper stockpiles—has reached a 50-year low. In the latest reporting week, LME copper inventory fell 6,100 tons to 89,300 tons, firmly below the psychological threshold of 100,000 tons in inventory. As a reminder, the world collectively consumes approximately 76,000 tons per day.
Below, a chart exemplifying the gradually dwindling demand of Cu stocks since 2018:
In a February CNBC interview, Wood Mackenzie’s Vice President of Metals and Mining, Robin Griffin, exclaimed that, “we’re already forecasting major deficits in copper to 2030.” The analyst predicted that a global shortage, fueled by increasingly challenging supply streams in South America and higher demand pressures.
Mr. Griffin’s prediction was one of many among mining analysts, from the large investment banks on down.
4. ESG Provisions Create Upward Pressure On Pricing
The copper market is on the verge of a significant supply crunch, raising concerns about meeting the growing demand driven by the energy transition. And the rise of environment, social and governance (ESG) practices is a major recent driver of demand. This transition alone could necessitate an additional one percent increase in copper demand per year. While this may seem modest, it equates to the equivalent of a large-scale copper mine coming online annually.
The discussion surrounding copper demand projections is ongoing, but the real issue lies in the aforementioned supply dynamics. The existing supply base is aging, and copper deposits with high-grade ores are dwindling. Moreover, the construction of quality projects has become increasingly challenging due to ESG considerations.
To address the potential supply deficit, industry experts believe that increased scrap utilization and the substitution or reduction of copper usage through innovative practices will play a role. However, the primary solution lies in a substantial supply response from the copper mining industry, which will likely require a sustained period of high copper prices to incentivize investment.
The scarcity of shovel-ready projects and the challenges associated with their development exacerbate the situation. And with many of the world’s largest mines now past peak production, it will take several years to right-size the current imbalance given the extent of new demand. And we haven’t even started yet.