Copper: Supply and Demand Moving In Opposite Directions

While many people look at Tesla (TSLA) as one of the companies mostly focused on sustainable solutions, The Golden Investor prefers to look at the fundamentals on which these companies are dependent on. In other words, it is important to look at the commodities that are essential for today’s most thriving companies and economies. Today The Golden Investor will focus on copper, the commodity which often correlates with global economic activity. However, in recent months the corona outbreak disrupted markets worldwide. But even though copper lost over a third of its value in the March sell-off, the material has seen a V-shaped recovery in pricing since. Together with this somewhat unconventional resistance to a global crisis and the positive long run outlook for the commodity, we can say copper should be valued as a valuable part of every portfolio.

Copper’s great electrical conductivity and the full recyclability are the two main characteristics of copper that will boost and support copper prices on the long run as sustainable and useful material in the era of environmentalism. One of the largest copper producing countries Chile has struggled with the containment of the coronavirus and had to close many copper mines where many miners have fallen ill with the disease. In combination with increased demand out of China due to higher industrial activity in the second quarter, which was boosted by infrastructural projects of the Chinese government. This has led to a unusual disparity between global economic activity and copper prices.

Figure 1 – Commodity Prices After The Corona Sell-Off

The lack of a substitute for copper as conductor will lead to higher copper prices in the future, especially when new environmentally friendly electrical solutions will increase demand for copper. However, the copper mining business has struggled over the last ten years to find high grade copper ores, an example is Chile which is the largest copper mining country in the world. The lower grades have led to a 40 percent increase in greenhouse gasses emitted by Chile’s the copper mining sector. The 6 million tonnes of C02 emitted in 2019 represent around 7.5 percent of the total amount of greenhouse gasses emitted every year in Chile, which produces almost a quarter of the global copper supply. However, the copper mining business accounts for on average 10 percent of Chile’s GDP, which does not even include related sector. On the short term this prosperity has pushed the country to the highest levels of average welfare in South America, almost to the level of a first world country. However, as miners turn to lower grade mines, also side products as arsenic and sulfur increase, making the extracting process harder. It is questionable if the struggling sector will harm Chile’s welfare level on the long run. Copper may have helped Chile to come out of the poverty trap, only time will tell.

Considering that recycling of copper is already in place in many developed countries and the relatively easy recyclability of copper, there is a limitation to the extent copper prices can rise. However, boosted by higher welfare levels in the BRIC-countries and the corresponding increases in demand for electrical products and transportation will result in copper prices that are likely to rise on the long run. EU prospects show that demand for copper will exceed reserves before 2050 in all scenario’s. Making it a perfect commodity for long run investment opportunities. Together with rare-earth metals and graphite, copper is a 21st century material and a perfect investment for pension funds who can handle the volatility.

The Golden Investor thinks investing part of your portfolio in industrial commodities is very useful as a balance to safe-haven characterized precious metals like gold and silver. Copper can counterbalance for drops in precious metal prices when there is an outflow out of safe havens, while still providing slight protection against (unconventional) stimulus. Even if copper underperforms on the short run, the long run perspective provides a decent risk-return ratio. Tesla won’t fly to Mars without Chile’s copper.

Disclaimer: The Golden Investor is not a fortune-teller, be sure to make the right decisions in accordance to your own financial situation, this is not investment advise or anything like that.



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