Chek the Channels
Betting on The Future of Copper.
(Note: companies that could be impacted by the content of this article are listed at the base of the story (desktop version). This article uses third-party references to provide a bullish, bearish and balanced point of view; sources listed in the "Balanced" section)
Copper is prized for its extensive applications, including as a component in electronics and motor vehicles. It is called Dr. Copper because it is often viewed as a leading indicator of changes in the business cycle given its use in many sectors of the economy. Demand for copper is poised to benefit from greater usage for electric vehicles, communications and clean energy systems, such as solar thermal plants. Bloomberg recently published an article highlighting that more than a third of capital spending by a group of large diversified miners is being dedicated to copper, up from 20% or less earlier in the decade, to prepare for demand growth.
Copper demand will benefit from electrification. From communication devices to electric vehicles, demand for copper is expected to grow. The average internal combustion engine contains about 50 pounds of copper, while electric vehicles contain roughly four times more copper than conventional cars. Powering EVs will also require changes in electrical infrastructure that could benefit copper demand.
Demand has outstripped supply. After several years of supply deficits, global stocks of refined copper have been on a downtrend. The International Copper Study Group forecasts a global refined copper balance deficit of 65,000 tonnes in 2019. Therefore, prices could benefit from tight supply/demand fundamentals, which could also encourage companies in the copper supply chain to prepare for demand growth.
Industrializing countries will need copper. Since 1900, usage for refined copper has increased from less than 500 thousand tonnes to 23.8 million metric tonnes in 2017; a compound annual growth rate of 3.4% per year. The key driver of global refined copper usage has been Asia, where demand has expanded almost eight-fold over the past four decades.
Slowing economic growth. A slowdown in U.S. and global economic growth could negatively impact demand for copper.
Inefficient global trade. Because copper is dependent on trade flows among numerous countries that import or export copper, protectionism or nationalism in favor of free global trade could distort markets and increase inefficiencies. Political risks, including resource nationalism, could also pose constraints on copper supply growth which would likely increase prices.
Increased regulation. Copper supply growth could also be impacted by greater environmental regulation which could increase costs but lead to higher prices.
Emerging technology. Much like the copper wire for wireline telephone service has been displaced, advanced technologies and/or substitute materials could compete with copper. However, given its versatility and relative affordability, no other material seems poised to displace copper at the present time.
The case for copper appears more bullish than bearish. While copper will remain sensitive to changes in economic growth, secular trends in demand growth may make it less sensitive to turning points in the business cycle. Less volatility in the commodity price could make it more attractive for investment by the mining industry and promote a better match between demand and supply growth.Sources:
The World Cooper Factbook 2018, The International Copper Study Group, 2018
Preliminary data for November 2018, The International Copper Study Group, February 21, 2019
Copper Market Forecast 2018/2019, The International Copper Study Group, October 3, 2018
Copper Underpins Development of EV Charging Infrastructure, International Copper Association, April, 2018
Biggest Trading in Copper Options Ever Signals Supple Troubles, Michael Roschnotti and Justina Vasquez, Bloomberg, March, 18, 2019
Miners are Budgeting for a Recovery in Copper, David Fickling and Elaine He, Bloomberg, December 20, 2018