Investment Watch: Why Now is the Right Time to Invest in Copper Stocks?

Base metal stocks do not garner as much attention in trading circles as shares in precious metals and technology companies. But not many people are aware that a copper bull run has already started, and it is predicted to continue for several years. Copper prices are going through the roof and are projected to continue rising. Supplies of the red metal are dwindling, while demand is increasing exponentially. Read on to find out why now is the right time to invest in copper stocks.

1. Copper has a diverse range of industrial uses.

Unlike gold and silver, which are usually primarily regarded as hedges against inflation, copper is used for practical applications in many different industries. Copper is heavily used in the construction and power industries to make plumbing fixtures, cables, and electrical wires. The red metal is also used in electric vehicles (EVs) and the computer industry. With such diverse applications, there is always a heavy demand for copper.

2. The demand for copper is increasing and will continue to rise.

Copper is an integral raw material in many industries. When the economy of a country expands, the demand for copper goes up. With more and more countries reopening after prolonged periods of pandemic shutdowns and their economies reflating, the demand for copper has started to rise. The demand is being driven by China.

China is the world’s largest consumer of copper, and according to market analysts, the Chinese economy is on the upswing. The country’s construction and manufacturing sectors consume about half of the world’s copper. Boosted by government stimulus measures, tax exemptions, and reduced interest rates, these sectors have rebounded strongly from the Covid-19 shutdowns. The China Caixin Manufacturing Purchasing Managers Index (PMI), a yardstick for measuring the health of the factory sector, has been inching upward after the country got a grip on its Covid-19 situation. A higher PMI value means the factory sector is expanding.

Copper demand in China has also increased in recent years after the government boosted infrastructure spending. For instance, China’s ongoing One Belt One Road project is a global infrastructure development undertaking that aims to improve connectivity between multiple countries spread across Asia, Africa, and Europe. The infrastructure projects include railroads, roads, railroad tunnels, ports, airports, dams, and skyscrapers.

As part of its green infrastructure and clean energy plan, the Biden administration has announced that it will upgrade municipal transit networks across the country and expand broadband and wireless broadband services to provide access to all Americans. This means that the demand for copper will also increase in the U.S.

The rapid expansion of cloud computing has seen an increase in the number of data centers that need large amounts of copper wire to operate. Copper is also an integral component of batteries that power renewable energy systems. As the world moves toward a greener future, the demand for renewable energy systems will increase.

3. Increased adoption of EVs will fuel the demand for copper.

In terms of conductivity, pure copper is second only to silver. EVs use more than twice the amount of copper than internal combustion engine vehicles.

The adoption of EVs is increasing all over the world. Prime Minister Boris Johnson has announced plans to stop selling diesel and gasoline vehicles in the U.K. by 2030. Israel has announced that it will phase out fossil-fuel vehicles by 2030, while Norway plans to do so by 2025. China has announced that it will remove all gasoline-powered vehicles from its roads by 2035.

Germany has introduced subsidies for people who buy battery-powered vehicles. There are no such benefits in place for buyers of internal combustion engine vehicles. This is a move to encourage more people to adopt EVs. The sales of electric vehicles in the U.S., China, and Europe have increased in each of the last 10 years. The demand will continue to rise and will fuel the demand for copper.

The red metal is also used extensively in EV infrastructure. The wires in the charging station that connect the charger to the electrical panel as well as the charging cable are largely made of copper. According to Wood Mackenzie, there will be more than 20 million EV charging points around the world by 2030, consuming 250% more copper than what was being used in 2019.

4. The supply of copper has dwindled in recent times.

The two largest copper producers in the world, Chile and Peru, are yet to recover fully from the Covid-19 shutdowns and quarantine measures. Copper production in the Peruvian mines fell by 42% in May 2020. Copper production in Chile cratered in the third quarter of 2020 after the state-run miner Codelco had to suspend operations at its flagship mine and temporarily close its largest smelter and refinery. Although production is picking up, the disruption will have a long tail.

According to the International Copper Study Group, the global copper mining output in 2020 was 0.5% lower than the levels in 2019. That copper is increasingly in short supply is evident from this piece of statistic: inventories of the metal at the London Metal Exchange warehouses totaled 120,000 metric tons in March 2021, compared to 300,000 metric tons in the previous year. But supplies of the metal are not expected to pick up soon.

Resource nationalism has been on the rise for quite some time. Governments around the world are increasingly trying to assert control over natural resources to increase mineral royalty revenue.

Copper production in Chile is likely to hit major roadblocks in the form of increased regulatory controls put in place by the government. The government has imposed progressive royalty on copper sales and has tightened the rules surrounding extracting water, preserving community rights to national resources, and protecting glaciers.

Russia has imposed mineral-extraction taxes to help offset some of its pandemic deficit.

The Democratic Republic of Congo (DRC), one of the largest producers of copper in the world, introduced the Mining Code in 2018 that added 50% tax on unexpected windfall revenues, enabled royalties on “strategic substances” during times of increased global demand, and mandated that its citizens hold 10% stake in mining companies. These regulatory controls increase the costs of operation for mining companies. Worse, stringent regulations threaten to choke investment in mining operations.

Ore grades are deteriorating in major mines across the world as producers use up the deposits in the easy-to-mine ore zones. This will also inflate the costs of extraction.

5. Copper prices are expected to rise in the coming months.

The demand from China, a rise in green expenditure throughout the world, a dearth of mining projects, and supply bottlenecks in South America have pushed up copper prices that are trading near their all-time highs.

Depleting inventories will drive up the price of copper. When nickel inventories were dwindling at the London Metal Exchange warehouses in 2006-2007, the price of the metal shot up by 300%. Copper has already touched $10,000 per metric ton in recent times. According to Bank of America, the world risks running out of copper, and the price of the metal could hit an eye-watering $20,000 per metric ton by 2025.

Goldman Sachs has dubbed copper as “the new oil” and predicts that the metal’s bull run will continue for several years.

6. Copper stocks are traditionally cheaper than many other metal stocks.

Stocks of firms producing base metals, such as copper, traditionally fetch higher dividend yields than gold stocks. Base metal stocks also tend to be cheaper than gold and other precious metal stocks in terms of their earnings and cash flow. So, investing in copper is less risky than parking your money in gold and many other metal stocks.

With increasing demand and shrinking supplies, a multi-year bull market for copper is inevitable. As the costs of operating mines and extracting rise, the price of copper will increase too. There is no better time than now to invest in copper stocks.