Not all that glitters is gold, is there something in copper?

The prolonged concern about inflationary pressures has certainly brought the commodity market back into the spotlight for many investors looking to protect their portfolios from inflation. Given that the last decade has been marked by a secular trend of deflation, a good portion of investors has excluded commodities from their portfolios, so it is not surprising that they have shown significantly weaker performance than the U.S. stock market (which has experienced the longest “bull run” in history).

The fact that the commodity market is back in focus is also evidenced by the Bloomberg Commodity Index (an index that tracks futures of various commodities such as natural gas, oil, gold, corn, copper, etc.) which has achieved a return of about 32% since the beginning of 2021. For comparison, this index last achieved a better annual return back in 1979.

The rise in commodity prices this year can broadly be explained by increased demand following the normalization of economic activity and insufficient supply as production capacities have not been able to adjust at the same pace. In today’s article, we will touch on copper, a commodity that has the potential to become one of the important components of the decarbonization story (i.e., the gradual but certain transition from fossil fuels to green, renewable energy sources).

Let’s start from the beginning – copper has widespread applications in a broad spectrum of economic activities such as the production and transmission of electricity, electronics, etc., and the demand for copper is often considered a good leading indicator of general economic sentiment.

In addition to its wide usage and prevalence, copper is also easily recyclable, meaning that most of the copper in the world has not yet been extracted from the earth’s crust (only 12% of total copper deposits have been mined so far). Therefore, it may sound somewhat contradictory that a large number of global analysts are warning of a potential copper shortage, which could lead to a sharp rise in prices. The reason behind this stance does not actually stem from the idea that the world is running out of copper, but rather from the fact that mining and recycling infrastructure is unable to keep pace with potentially strong demand growth. More precisely, copper could play one of the key roles in decarbonization, and thus the American investment bank Goldman Sachs referred to copper as the “new oil” in one of its analyses this year.

Greenhouse gas emissions have been one of the world’s biggest environmental problems for decades, receiving more and more attention in recent years. In order to reduce or eliminate CO2 emissions, the European Commission presented the “European Green Deal” at the end of 2019, which aims for the complete elimination of net greenhouse gas emissions by 2050. Without serious progress in carbon capture and storage technology in the coming years, the path to net-zero emissions will actually have to come from electrification and renewable energy sources. In this regard, the role of copper in the transition to a “green economy,” as a very (economically) viable conductor, can be extremely important.

Given that copper has the necessary physical properties for the transformation and transmission of these energy sources into their useful final state, analysts at Goldman Sachs estimate that demand for copper will increase by nearly 600% to 5.4 Mt by 2030. On the other hand, although the price of copper has risen by just over 100% from its low in 2020, we have not seen significant increases in copper supply in the global market. This can be explained by the fact that the supply of copper is quite inelastic due to the aforementioned reasons.

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copper prices

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Therefore, there are several reasons why an investor might want to expose themselves to the movement of copper prices, some of which may include:

• confidence in a relatively rapid transition to renewable energy sources that could lead to a rise in copper prices
• protection against inflation risk
• hedging, or limiting investment risk in instruments that would lose value with rising copper prices (manufacturers of electrical transformers and construction companies are a glaring example).

Some simple ways to gain exposure to copper can be achieved by investing in ETFs that track the price of copper, or their futures, such as the “United States Copper Index Fund” (CPER US) and in stocks of companies that may profit from rising copper prices.

Although we have seen a significant rise in copper prices from their low last year, it should be noted that historical price increases are not an indication of future performance, so individuals should be cautious with any investment. Additionally, there are always risks that can create pressure on copper prices. The first and most obvious is that decarbonization may fall by the wayside. While many believe in the irreversibility of such a scenario, it should be noted that decarbonization could potentially fall outside the priorities and political options that advocate it (e.g., in times of crisis). Furthermore, it is important to note that currently almost 60% of copper consumption comes from China, and a similar share of consumption is expected in 2025. Therefore, such an investment is quite exposed to actually one market, so any negative economic outlook for that country could lead to significant impacts on the movement of copper prices.