With tight supply and growing demand, we discuss the outlook for copper.
- The price of copper has enjoyed robust performance since the Covid-induced market trough in early 2020.
- Demand for the red metal is growing, given its use in clean energy and 5G technology, while supply remains tight.
- There are some potential headwinds to further price appreciation, including the risk of a slowdown in China.
The price of copper, often described as the global economic bellwether given the integral part it plays in industrial activity, has been one of the noteworthy Covid-recovery beneficiaries as activity has normalised. In addition to offering a multitude of valuable properties including strong conductivity, low reactivity to heat, and resistance to corrosion, its outlook is further enhanced owing to its use in the equipment required for governments to meet ambitious decarbonisation targets.
Copper is a key component in solar panels, wind turbines and batteries used for electric vehicles, and its role in clean energy production is paramount. According to research from IDTechEx, electric and plug-in hybrid cars are projected to account for 72% of the total automotive market by 2040.1 The move to 5G technology provides further pressure, with the need to accommodate increasingly complex uses of data; indeed, copper is an essential component in the infrastructure of high-speed internet.
We could well be in the first leg of a structural bull market for copper, although the ride may be bumpy and not without risks. While certain trends, such as the path towards greener forms of energy, are likely to be reassuringly long-term and support sustained demand for the red metal, one potential cloud on the horizon is a slowdown in China as authorities there shift their focus from the quantity to the quality of growth. This is likely to have repercussions for some of the ‘frothier’ sectors of the market such as property, which is unlikely to enjoy the speculation-fuelled ride it has done in the wake of the global financial crisis.
This potential headwind is counterbalanced by a number of positive considerations; copper is primarily used in electrical wiring which tends to be used in the latter stages of the building process, thereby limiting the immediate impact of a slowdown in new construction. Our view is that a pickup in other areas of copper demand like white goods, autos, machinery and grid spending may also help to offset property weakness. Moreover, copper inventories are at record lows and supply is tight, with the only realistic substitute being aluminium, the price of which stands near multi-year highs. It therefore looks unlikely that the copper price will be held hostage to a stalling of Chinese growth, even if this were to materialise in force.
In summary, copper demand sources are well-diversified, and we believe the metal could form part of an armoury of return-seeking assets, designed to capture the cyclical upswing as the recovery unfolds. While copper exhibits some inherent volatility, entailing a need to size the position accordingly in a multi-asset portfolio (although clearly this will depend on investors’ risk appetite), in our view it has an enviable position as a means of playing both the upswing in industrial activity and the move to embrace dominant 21st century trends, including the ‘greening’ of economies and the need for enhanced connectivity through 5G networks.
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