A Quiet Surge

The copper price has surged since April 2020, from under $2.50/lb to over $4.00/lb, making it one of the quiet winners during the pandemic investing boom. The price of copper is considered an economic bellwether, as an increase in demand means more large projects are being started, which is expected to promote general economic growth. Don’t expect the meme stock army to take an interest in the space – mining stocks remain less exciting to the common investor than retail or tech stocks.   

Tight Supply 

So what’s driving this rise to the highest prices reached since 2012? Tight supply and strong demand are both at play here. Analysts at Bloomberg Intelligence are forecasting a supply shortfall of 400,000+ tonnes during 2021. For context, 20M metric tonnes are mined annually. Copper inventories in LME-registered warehouses are near 15 year lows as well. Bloomberg analysts aren’t along – Goldman Sachs has stated the copper market is “now on the cusp of the tightest phase in what we expect to be the largest deficit in a decade”. Citigroup is forecasting a supply deficit until at least 2023.

Growing Demand

At the same time as this supply tightening, demand for copper is growing. There are long term and short term factors to consider. Vaccinations and lower rates of coronavirus infection are fueling the demand for copper because it means large projects can begin to move forward again. The US dollar grew weaker during 2020, which pushes copper prices higher as the US dollar is the primary currency for commodity purchases. A lower US dollar means more dollars are required to buy commodities. Of course, China plays a large role as well. Demand for copper from China is 4.7% higher during January and February 2021, compared to the same period in 2020.

Renewable energy is helping the copper price move higher too. Citigroup claims renewable power generation and related applications including battery storage account for about one fifth of the global copper demand. Specifically, power plants, which are often most effective if built where wind or sun is strongest, will need to be built in isolated areas. In these cases, cabling is required to get the harnessed energy to end uses. That cabling requires copper. Copper cabling is nearly twice as conductive as aluminum. That translates to more electricity for each unit of energy expended. 

A quick note here that aluminum is expected to be used by some wind farm projects if copper prices remain elevated or even continue to rise. The efficiency of energy production will be lower in cases where aluminum is substituted for copper. The aluminum price has also moved up from below $0.70/lb to ~$1.00/lb, so the amount of substitution possible seems limited.   

Electric vehicles (EVs) use four times as much copper as gasoline powered vehicles. Sales of EVs are expected to have grown by nearly 1M units during 2020. If you believe that the green energy trend will continue then you must also see an increase in demand for copper. 

With less copper being mined and less available in storage, funding would be expected to pour into the space to develop new ore deposits to match demand. Copper miners will likely find raising funding to be easier in this environment, but that does not mean copper prices will drop any time soon.

How Long Can Copper Remain Elevated?

To bring new production to market, a mining company typically needs to raise capital, engage construction and engineering firms, and then build the mine. Earning a social license to operate in the given jurisdiction is also an important part of the operation as it minimizes the risk of labour strikes and other issues. It can take years before the first pound of copper is produced from the new project. That means today’s high prices will start the financing process but may not lead to production increases for several years. All this assumes the deposit has already been discovered, which can also be a time-consuming process.  

Selecting a Copper Stock

One way to examine copper companies is by project. You might look for a low risk jurisdiction where labour strikes are unlikely and for a low cost of production on a per pound basis. 

The stocks that move the most as the commodity price rises aren’t the stocks of companies with low production costs. Low production cost companies will be more stable. The opposite is what to look for if you’re looking for the maximum potential upside. A company with a higher cost of production gains more profit (on a percentage basis) for each 1% increase in the copper price as the price rises above the marginal cost to produce. These stocks are more volatile so keep in mind to buy companies that match your tolerance and capability to take risk. It seems the copper market will be in a deficit for years to come, so it could be worthwhile to get some exposure in your portfolio. 

Thank You For Your Loyal Readership

The Financial Star team.