Sheets of copper cathode are pictured at BHP Billiton’s Escondida, the world’s biggest copper mine, in Antofagasta, northern Chile March 31, 2008.
Ivan Alvarado | Reuters
Copper is a leading barometer of global economic health due to its wide-ranging usage, including in electrical equipment and industrial machinery — it had a strong start to the year, given a weakening dollar and investor expectations to see a surge in demand after the reopening of the Chinese economy.
Short-term supply issues have also emerged alongside a rebound in demand, such as an eruption of protests in Peru, which accounts for 10% of the world’s copper supply.
Copper futures for March delivery settled at $4.1055 per pound on Thursday, after tailing off in recent weeks from the January rally.
Copper prices enjoyed a strong start to 2023 on hopes of resurgent Chinese demand as the economy reopened, but economic uncertainty has since returned.
Although he noted that a Chinese economic reopening and resurgent demand while copper inventories are near cyclical lows would likely lead to a short-term price surge, Chu suggested that the most interesting aspect of the copper outlook is a “secular change” in long-term demand:
“Copper typically is used as a construction metal for wiring for building, wiring for machinery and what not, but if we look at the decarbonization net zero energy transition trend, copper is the new oil,” Chu, who manages the BNY Mellon Natural Resources fund, told CNBC.
“Is it solar power, is it wind, is it EVs, is it any form of renewable energy? Every renewable energy pretty much needs copper, because if you’re talking about electrifying something and transmitting electricity, you need copper.”
Beyond the quantities of copper that are likely to be required to achieve net-zero goals, Chu also highlighted a decline in the grade of the metal over the last 20 years, as well as the length of time it takes to get major mining projects online.
“A lot of these reserves and deposits are found in very, very hard places to produce – Congo, Inner Mongolia – these are not in very developed regions where you say ‘oh it’s really easy, let’s build a mega-mine’,” he said.
“When you look at the long-term secular story, you can just see strong demand. A lot of people focus on lithium as the kind of energy transition metal, but I think we should be much more focused on copper, because I think that is the real pinch point, the real choke point for the energy transition story.”
Citing the old economic adage of “the best cure for high prices is high prices,” Chu said there will always be short-term cyclical volatility, but that the price of copper will likely keep rising until it incentivises much larger exploration cycles or a ramp-up of secondary markets and copper recycling.
“But there’s only so much those markets can do because the incremental demand from renewables isn’t a small bump up in demand, it’s almost a multiyear tsunami of demand coming through that we’re not thinking about, so it’s going to be all hands on deck but absolutely, the price has to go up,” Chu said.
‘Enormous political capital’
Chu’s comments were partly echoed in a Tuesday note from Saxo Bank Head of Commodity Strategy Ole Hansen, who said industrial metals such as copper, aluminum and lithium would undoubtedly benefit from the “enormous political capital” being invested in achieving the “green transformation.”
“In addition, the new geopolitical environment will mean a massive boost for the European defence industry which should see double-digit growth rates close to 20 percent per year over the next economic cycle as the European continent doubles its military spending in percentage of GDP,” Hansen said.
Speculation has also abounded that Beijing — as the world’s top consumer — will ramp up its fiscal support to the economy on a scale similar to that seen in 2003 after its entry to the WTO, in 2009 after the global financial crisis, and following the 2016 currency devaluation.
Hansen suggested that the strong start to the year was primarily driven by “technical and speculative traders frontrunning an expected pickup in demand from China in the coming months.”
“Once the initial rally is over, the hard work begins to support those gains, with an underlying rise in physical demand needed to sustain the rally, not least considering the prospect of increased supply in 2023 as several projects go live,” he said.
“Overall we see copper settle into a USD3.75 to USD4.75 range during the coming months before eventually breaking higher to reach a new record sometime during the second half.”
Copper stocks carrying ‘scarcity value’
After benefiting from the climb in copper prices in January, valuations of copper mining stocks appear “stretched,” according to Morgan Stanley.
The Wall Street giant believes sentiment and supply risks could carry the sector higher in the short term, suggesting a “scarcity value” is driving capital towards miners.
“With global equity capital chasing a shrinking investable copper universe, investors appear willing to overlook operational disappointments,” Morgan Stanley metals and mining analysts said in a research note outlining the sector’s “scarcity value.”
“Outlook updates have been negative across the board as 1) unit costs came in 12% higher on average and up 7% y/y; 2) capex was 8% above expectations; and 3) volume guidance missed by 4%. As investors pursue copper exposure, we note rising valuation premiums.”
Although reluctant to call the peak just yet, as supply risks in Peru and elsewhere keep the market tight and push exposed equities higher in the near term, Morgan Stanley only sees aggregate upside of 6% to 12% using spot/bull price projections.