Hot Topic: Copper

Copper has developed something of a reputation for acting as a good barometer for the health of the global economy. Its extensive use in consumer goods and manufacturing mean that any concerns about a slowdown in the underlying economy leaves businesses buying less and the price falling. Some market commentators even give the asset the nickname Dr Copper, as it’s so good at understanding economics, it has been awarded a PhD, but is the popular metal close to seeing its reliability as an accurate gauge of sentiment set to change? Demand drivers for copper are on the cusp of some fundamental changes, so we take a look at what these are, and what might happen in the future.

The above chart shows the performance of copper over the last 20 years. Note specifically the big move higher as demand from the burgeoning Chinese economy was felt between 2002 and 2006, and also the sharp decline as the global financial crisis took hold in 2008.

Prices may have wavered in 2015 but underlying economic growth has been maintained. There was another bout of uncertainty in 2018 as US-China trade tensions began to accelerate, but again the worst of the effects have been shrugged off, at least so far

Obviously fundamental factors such as supply disruption can also have a meaningful direct impact on the price of any metal, and Copper is no exception. In June 2019, copper prices were dragged away from close on two year lows following news of strike at a mine in Chile and with supply scarcity a repeated theme for the metal, news like this will frequently end up driving prices higher.

But is copper soon to arrive at a turning point, where its price will no longer be that simple barometer of the global economy? A typical electric car contains more than one mile of copper wire with a total of over 80kgs of the material used in just one vehicle. There’s no escaping the fact that the environment is increasingly forcing its way towards the top of the agenda, and one report suggests that by 2027, the demand for copper simply as a result of electric vehicles will increase by 1.7 million metric tonnes.

So does this in itself present a problem? The headline number may seem big, but in 2016, global copper production was said to be almost 20 million metric tonnes. That number is estimated in various reports to now be growing at between 0.5 million and 1 million tonnes a year, too. But electric vehicles only show part of the picture. A fast charging point for a car can use as much as 8 kgs of copper, whilst a single wind farm can use as much as 7,000 tonnes.

The pace of adoption when it comes to finding more environmental ways of generating electricity - and subsequently moving around - could therefore be pivotal when it comes to understanding just how well the current copper mining infrastructure can cope with the demands it will face.

Beyond this however, if we end up in a position where a significant portion of global copper output is being used for products which are far more resilient to movements in the underlying economy, will the metal lose its moniker of barometer of the global economy and instead migrate to being a far more defensive play? After all, we always need to keep the lights on.

 

 


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