Copper upside remains despite months of inaction
Head of Commodity Strategy
Summary: Industrial metals spent most of November trading sideways with concerns about demand being offset by tight market conditions, especially in aluminum and copper. In fact, the price has during these past few months, when worries about Chinese demand took centerstage, been trading relatively close to the average price seen since April. A behavior which in our view highlights a strong underlying demand for copper, not least considering the prospect for inelastic supply struggling to meet green transformation demand towards electrification.
Industrial metals spent most of November trading sideways with concerns about demand being offset by tight market conditions, especially in aluminum and copper. Apart from two failed upside attempts in May and October, copper has since April stayed mostly rangebound not swaying too far away from its average price, at $9550 per tons in London and $4.35 per pound in New York.
During the past few months copper has performed relatively well considering heightened worries about the economic outlook for China, and more specifically its property sector which has seen near defaults as well as a slump in home sales. Additional headwinds have been created by the stronger dollar and central banks beginning to focus more on inflation than stimulus. In order to counter Chinese economic growth concerns, Vice Premier Liu He has been out saying growth this year should exceed targets, and the government plans more support for business.
High Grade Copper has been averaging $4.35 since April with the current action confined to a range between $4.2 and $4.5 while major support can be found in the $4 area. The lack of momentum in recent months has driven a sharp reduction in the speculative long held by hedge funds, a development that could trigger a significant amount of activity once the technical and/or fundamental picture becomes clearer.
Against these mostly demand focused macroeconomic headwinds, we have at the same time been witnessing an unusual synchronised tightness in stock levels monitored by the major futures exchanges in London and Shanghai. Unusual in the sense that price arbitrage between the two exchanges often drive changes in stock levels from one exchange to the other. Recently however we have been witnessing levels fall at both exchanges, with aluminum and copper stockpiles at the LME falling to their lowest levels since 2007 and 2005 respectively.
In fact, the six industrial metals traded on the LME are currently all trading in backwardation for the first time since 2007. A condition where spot prices trade higher than futures, and driven by the mentioned drop in inventories in response to a post-pandemic surge in demand as well as supply-chain disruptions.
On the subject of supply, especially during the coming years when the green transformation will account for an increased proportion of global copper demand, planned mining taxes in Chile, the worlds biggest producers have raised the alarm bells. Politicians are looking for a bigger share of mining profits to help resolve inequalities exacerbated by the pandemic, and with a potential approval moving closer BHP Group has warned it could derail investments thereby making it harder to meet future demand, especially considering the mentioned need for copper towards electrification.
An example of increased copper demand driven by the green transformation are the number of finished and planned subsea interconnectors which are paramount for cutting emissions and boosting the effectiveness of renewable energy production. Increased volatility in the production of power from renewable sources such as wind and solar as opposed to traditional sources like coal and gas will continue to increase the need for large scale transmission capabilities of power between countries and regions.
The cable below has been used in the now finished 720 kilometer North Sea Link between Norway and the UK, as well in the under-construction Viking link between Denmark and the UK. It carries as much as 1.45 Gigawatt (about the capacity of a nuclear reactor) with most of the 50 kg/meter weight coming from copper. Several other subsea links are planned over the coming years, and together with the need for increased capacity on the electrical grid to support the roll out of EV’s, demand for copper, the king of green metals, look set to increase over the coming years.
Electrification and urbanisation will drive growth in copper wrote my colleague Peter Garnry in this update from November 19. In it he also offered a table of mining companies providing exposure to copper.
The table below shows 16 mining companies with exposure to copper with Codelco, the largest copper producer in the world, absent from the list as the Chilean miner is only listed in Chile and thus not investable for our clients. The copper mining industry has delivered a median total return in USD of 132.6% over the past five years beating the global equity up 105% in the same period. The rising copper prices the past year driven by investors positioning themselves in green metals (defined as metals that will play a key role in the green transformation) which in turn has pushed up revenue in the industry by almost 40%. Sell-side analysts are generally bullish on copper miners with a median upside of 16% from current levels. In our view investors should select one or two copper miners to get exposure and avoid the ETFs on the industry as they are too broad-based and lack the pure exposure profile needed to play the copper market.
As the table also show, there is no such thing as pure exposure to copper except for futures, options and CFDs on the underlying copper. The miner with the highest revenue exposure to copper is Antofagasta with 84.8% revenue share from copper extraction and refining. Most copper miners also extract gold and silver as part of their copper operations, and out of the 16 copper miners in our list, only 6 of these miners have more than 50% of revenue coming from copper extraction and refining.