Is COPPER set for long-term gains?

Copper, a versatile commodity that can be used for a range of industrial applications in a variety of sectors, has been the subject of an increasing amount of discussion amongst investors in recent weeks. On the 4th of November, prices for the 100% recyclable metal rose by 7.5%, the largest daily rise since 2009.

By Giles Coghlan (pictured), Chief Market Analyst, HYCM

Despite this, copper futures are trading around 17% lower in the year to date at the time of writing, which is likely to be deterring investors from backing the so-called ‘king of green metals’ in the short-term.

However, demand, and therefore prices, are likely to grow in the coming years as the world begins its shift to a greener future at a faster pace. An integral part of the ‘green revolution’, increasing production of electric vehicles (EV) and implementation of clean energy projects is set to double the demand for copper to 50 million tonnes by 2035.

As such, the long-term future for the price of copper looks bright, but what’s been holding it back?

What is driving low demand and prices for copper in the short-term?

Like many other commodities, copper prices are largely driven by the overall health of the global economy, due to its wide applications across a variety of industries. As such, global recessionary fears are limiting demand and pushing prices lower.

Indeed, concerns that rampant inflation would limit the spending power of large manufacturers caused threemonth copper on the London Metal Exchange (LME) to drop by 2.8% in July, dipping below $7,000 per tonne for the first time since November

2020. Such a decrease came in the midst of a four-month period that saw prices fall by 35%. Clearly, copper markets and investors have little confidence in copper in the shortterm future.

Similarly, central banks’ hiking cycles are also strangling demand. In September, for instance, the Federal Reserve increased the base level by 75 bps, causing predicted copper delivery for December to decline by 3.89%. In this case, copper markets appear to be concerned that aggressive central bank action to combat inflation will cause global economies to slip into recession, which would ultimately drive down demand.

A strong USD is another factor that has limited the price performance of dollar-priced metals like copper. As a result, buying copper has become more expensive for investors holding other currencies, hindering investor sentiment.

Similarly, rising COVID-19 cases in the world’s largest importer of copper, China, could limit economic activity in the country due to its Zero-COVID policy, which will impose further pressure on demand. Indeed, the premiums on Chinese copper imports have plunged from $144.50 a tonne in the first two weeks of November to $102.50 in the week of the 14th of November as a result.

Increased supply

Meanwhile, the production of copper has been steadily increasing. In fact, global refined copper production is set to rise to more than 26 million tonnes in 2023.

As a result, some analysts are predicting that the copper markets will go into a surplus of around 691,000 tonnes in 2023, up from a deficit of 162,000 in 2022. This will inevitably lead to lower prices in the short term. Indeed, experts say that prices could drop as low as $6,600 between December and March. However, perhaps the long–term future for copper looks brighter than short.

Why the shift to a greener future means that copper will reach new heights

Firstly, it’s important to note that, as a barometer of global economic health, the demand for copper is likely to increase as the world’s economies recover following the current recessionary period. However, there are several other long-term demand trends that will be increasingly supportive to copper.

The transition to clean energy, for example, will undoubtedly increase demand. In fact, since renewable energy systems require 5x more copper than traditional power generation, experts suggest that the world will need to use more copper in the next two decades than it has in the last 130 years if we are to effectively make the transition to net-zero. For example, 3.6 tonnes of copper are needed to produce a megawatt of wind energy. By 2027, it said that nearly 600,000 tonnes of additional copper will be needed to keep up with this demand.

Meanwhile, electric vehicles (EV) require around 80 kilograms of copper per car. As the popularity of EVs grows, so too will demand for copper. In Q2 2022, for instance, EV sales accounted for 5.6% of the auto market, up from 2.7% in Q2 2021. Paired with the fact that EVs use 2.5x more copper than their fossil fuel guzzling counterparts, this demand should boost prices in the copper markets. Indeed, even if the world didn’t invest in green energy solutions, the rising demand for EVs alone would require 6 million tonnes of additional copper production. For copper investors, this should be the cause of a good deal of optimism. As demand catches up with supply, prices will inevitably rise. What’s more, copper could provide cheaper exposure to the green revolution than investments into wind or solar energy, so holdings in copper are likely to be increasingly profitable in the years to come.

To briefly conclude, while the demand – and thus prices – for copper is being pressured by fears of a global recession, the scale of the climate emergency and the need for a ‘green revolution’ grows by the day. As such, copper will be increasingly in demand over the next decade and more, which should provide investors with some exciting opportunities in the long-term.

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Giles Coghlan is Chief Market Analyst, HYCM – an online provider of forex and Contracts for Difference (CFDs) trading services for both retail and institutional traders. HYCM is regulated by the internationally recognized financial regulator FCA. HYCM is backed by the HYCM Capital Markets Group providing trading services since 1998. The Group via its relevant subsidiaries have representations in Hong Kong, United Kingdom, Dubai, and Cyprus.