The boss of the trading company I used to work for in my previous life was very gloomy about the future price of copper. As plastic was taking over as the go-to material for pipes and plumbing, he was convinced that demand for the red metal would gradually shrink over time. His strong convictions proved wrong as we know.
The energy transformation, no matter how slowly moving, has brought about a new, unsatiable need to repurpose and expand electrification. This is accompanied by a rising demand for copper.
New power lines, electrical engines, batteries, solar panels and wind turbines installed at pace give copper an indispensable role. This means vastly more demand for the base metal than could have been predicted three decades ago. ‘Dr Copper’ has regained its reputation as the lead indicator for economic growth. Industrial health is measured in copper again.
While the stresses of climate change indicate that we have changed tack too late, the share of – copper-intensive – renewable energy production is increasing rapidly.
As retail investors, we do not have immediate tools to bet on the long-term success of copper. Futures markets offer contract parcels with a fixed expiry date – three months or a year from now, typically. There’s no way to know with certainty that on the day of expiry the copper price will be up. Like all commodities, daily fluctuations are too high for meaningful retail speculation. Copper metal ETFs, if they existed, would use futures markets to offer exposure, making sure that each and every three-month loss would be realised, while fees eat away. Think of crude oil ETFs.
As retail investors, we do not have immediate tools to bet on the long-term success of copper
The only avenue open to speculate is to invest in copper miners and trading houses. Here, ETFs are on offer. Yet, retail investors, beware. Spare capacities and production shortages are fluctuating within a small, unpredictable, yet decisive range, altering prices rapidly.
The year 2023 ended promising for the red base metal. Prices were up for the year, pushed by hopes for a strong industrial revival of China after the crushing economic fetters of COVID lockdowns were loosened. Goldman Sachs, the investment bank, predicted the copper price to rise to $US10,000 per ton. The first months of this year brought a rude awakening. Industrial China is considered to weaken again. The first months of 2024 saw the copper price deteriorating.
What moves the needle is not only global growth, but events on the mining level. Mine closures, mine openings, political upheavals. Big producing countries are Chile, Peru, Congo and Mexico. They are exposed to civil strife, strikes and accidents. Water shortages, landslides, environmental mishaps and randomly imposed tariffs by importing countries will weigh on their output. Think of Trump 2.0.
What lifted prices in 2023 were predictions by one of the major mining companies, Anglo American, of eminent production shortages. Exhibit one was a ruling by Panama’s supreme court that the mining operations of the Canadian mining giant First Quantum will have to be abandoned. The project was brought down by the broad public, fearing further deforestation and water shortages. “We don’t want to be a mining country,” the protesters shouted, bringing an end to 75 per cent of Panama’s exports. A $US 6.8 million investment looks a lot like a write-down now.
Transport bottlenecks play a role, as do financial conditions. High interest rates in the US have strengthened the dollar, which typically weighs on the dollar-denominated market price of copper. It makes, on the other hand, warehousing of the metal more expensive, increasing volatility. Higher finance costs brought about by monetary tightening reduce new investment, as do political risks ala Panama.
A good example for political uncertainty is the Oyu Tolgoi mining project in Mongolia. The deposits under the sands of the Gobi Desert constitute one of the largest known copper (and gold) deposits on earth, an estimated 35 million tons. The deposits were known to Genghis Khan’s warriors, who already mined in the area. In the 1950s, Soviet geologists, as Mongolia was a Soviet satellite at the time, confirmed outsized mineral deposits.
In 2001, the Canadian miner Ivanhoe started exploration operations at the site. 2010 construction began in earnest. By 2013, first batches of copper concentrate were exported to China. Since commencement of the works, the budget ballooned from $US 4.6 billion to $US 10 billion today. This caused frictions with the Mongolian government, which as a penniless minority owner (34 per cent) was urged to financially contribute to the start-up. The lopsided public-private partnership was also marred by accusations of bribery. Mongol officials were found with sizable wealth squirrelled abroad. The production-sharing agreement was tilted to Mongolia’s disadvantage, environmentally harmful and vastly behind schedule.
Only in 2022 things cleared up when Rio Tinto, the mining behemoth, which until then operated at arm’s length to the project, took full financial and operative responsibility and ended the major disagreements with the government. The mine is expected to deliver 500,000 tons of concentrate per year. As Mongolia is landlocked, the mine has only two potential buyers, its dominant neighbours: Russia and, more likely, China. This makes price discussions tricky. As we can see from this example and Panama’s above, adding or subtracting half a million tons from the market will have a decisive impact on world copper prices, tapered by Chinese demand.
Putting money into the world’s biggest miners makes therefore for a highly speculative investment decision. It hinges on demand and happenstance. The slowing market of EVs, indicated by Tesla’s share price, slowing EV production by Ford and the decision of car rental company Herz to reduce its EV fleet by a third to replace it by petrol-driven cars, is ominous for copper demand, as is the worryingly slow restructuring of the grid system to befit renewable power generation, or the slow roll-out of EV-charging stations and the still considerable price hurdle for EVs.
We need to vastly expand carbon-neutral power generation if we want to slow the dangerous rise of global temperatures. Whether miners of rare earth minerals, nickel and copper will enjoy rising share prices will remain unpredictable. The inexorable deterioration of our environment on the other hand is sadly predictable.
If faster roads to sustainability and adaptation are not taken without further ado and at scale, like the revival of nuclear power and the advancement of hydrogen and fusion technologies, we’ll have to refit the St Paul’s Catacombs as heat shelters.
Andreas Weitzer is an independent journalist based in Malta.
The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice, or advice on the buying and selling of financial products.
andreas.weitzer@timesofmalta.com