With tight supply and growing demand, we discuss the outlook for copper.
Key points:
- 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.
Potential headwinds
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.
Diversified demand
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.
Sources:
Authors
Catherine Doyle
Investment specialist
This is a financial promotion. These opinions should not be construed as investment or other advice and are subject to change. This material is for information purposes only. This material is for professional investors only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those securities, countries or sectors. Please note that holdings and positioning are subject to change without notice.
This material is for Australian wholesale clients only and is not intended for distribution to, nor should it be relied upon by, retail clients. This information has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person. Before making an investment decision you should carefully consider, with or without the assistance of a financial adviser, whether such an investment strategy is appropriate in light of your particular investment needs, objectives and financial circumstances.
Newton Investment Management Limited is exempt from the requirement to hold an Australian financial services licence in respect of the financial services it provides to wholesale clients in Australia and is authorised and regulated by the Financial Conduct Authority of the UK under UK laws, which differ from Australian laws.
Newton Investment Management Limited (Newton) is authorised and regulated in the UK by the Financial Conduct Authority (FCA), 12 Endeavour Square, London, E20 1JN. Newton is providing financial services to wholesale clients in Australia in reliance on ASIC Corporations (Repeal and Transitional) Instrument 2016/396, a copy of which is on the website of the Australian Securities and Investments Commission, www.asic.gov.au. The instrument exempts entities that are authorised and regulated in the UK by the FCA, such as Newton, from the need to hold an Australian financial services license under the Corporations Act 2001 for certain financial services provided to Australian wholesale clients on certain conditions. Financial services provided by Newton are regulated by the FCA under the laws and regulatory requirements of the United Kingdom, which are different to the laws applying in Australia.
Comments