Skip to main content Skip to site footer

You are using an outdated browser. Please upgrade your browser to improve your experience.

‘Doctor Copper’

one month ago

Niall Sexton, Investment Manager

Niall Sexton,
Investment Manager, Architas

‘Doctor Copper’

The performance of copper has long been regarded a useful indicator about the state of the global economy. This industrial metal had a strong start to 2023, with the best January for its US futures in twenty years. What now? Supply challenges could push the price higher, as production is not keeping pace with demand because mining companies prioritise shareholder returns. China demand, a weaker $ and the energy transition could also prove supportive for the price.

Why copper?

One of the first metals to be extracted and used by humans, copper has a wide range of applications. Reflecting its high energy efficiency, approximately 60% of global copper output (21 million tonnes in 2021) is used in electrical applications, such as power generation and transmission. The mining of copper ore is highly geographically concentrated, much more than for oil for example. Chile is the world’s largest supplier of copper ore, accounting for 27% of global production, with Peru providing a further 10%. China is another major producer, and it is also the world’s largest consumer, accounting for more than half worldwide refined output. 

A useful indicator for the global economy

Some investors believe copper’s multiple applications make it a useful forward indicator of global industrial demand, and for the health of the world economy, hence the moniker ‘Doctor Copper’. The reality is more complex. While copper does have some unique and increasing applications, all commodity prices reflect the interplay between supply (both production and stockpiles) and demand. Current market dynamics for copper are the result of mining companies remembering the ‘bust’ that followed the commodity markets ‘boom’ in the mid-2000s. Until recently, many mining companies have preferred maximising returns from existing mines and this has led to underinvestment in both new mines and exploration activity. While this approach has rewarded shareholders, it risks creating a shortage – not just for copper, but for other commodities and materials used for renewable energy, including lithium and cobalt. Lead times to develop new copper mines are as much as 20 years, and intuitively it can be difficult to significantly raise expenditure at a time of heightened recessionary fears, higher interest rates and a more difficult environmental backdrop for increasing mining output.

Demand set to rise strongly, but why?

Copper demand is projected to double to 50 million metric tonnes (mmt) in the 10 years to 2035 according to a study by S&P Global. About half of this is because copper will help to underpin energy transition plans, leading with its applications in electric vehicles (EVs), renewables and power infrastructure. Non-energy transition end markets such as communications, data processing and storage will also require more copper usage. Demand from China will continue to be important. Apart from the need in more traditional applications such as manufacturing and construction, this country has a disproportionately large exposure to energy transition technologies, such as global solar photovoltaic (PV) cells. It is also the world’s largest market for EVs. China’s commitment to carbon neutrality by 2060 and the goals of the latest strategic Five Year Plan will also underpin the domestic demand for copper.

Europe’s ambitious decarbonisation goals mean this bloc is the second largest consumer of copper, while in the US, the Inflation Reduction Act, with its goal of clean electricity and EV demand also provides growing pull factors.

Architas view

Our view

There are a number of factors that could promote short term price volatility for copper, such as lower expectations for global growth and the fall-out from the recent banking crisis. Yet the long term picture is dominated by supply challenges. New mining developments are not progressing at a fast enough pace to meet growing demand. Much of this is from the energy transition, which might reduce some of the traditional cyclicality of demand for copper, such as when growth expectations are being downgraded.

The copper price has recovered since November 2022. Should the US Federal Reserve (Fed) slow or even halt its rate tightening cycle, any resulting weakness in the US dollar would make copper and other commodities more attractive to non-dollar buyers. Further support could come from supply lagging demand and physical stocks of inventories at multi-year lows.

We use cookies to give you the best possible experience of our website. If you continue, we'll assume you are happy for your web browser to receive all cookies from our website. See our cookie policy for more information on cookies and how to manage them.