The Fundamental Analysis of Copper: What Diversified Investment Strategy Exists?

The copper market is currently experiencing a robust upswing, propelled by a confluence of factors, including supply challenges and cyclical improvements in the global economy. LME's copper futures have surged above the psychological mark of US$10,000 per metric ton and are heading toward US$15,000.

What are the driving forces behind this surge, and how can you effectively tap into this metal's potential through diversified investment strategies?

Copper is the most conductive metal after silver; the average car has approximately 65 pounds (29 kilograms) of copper, and more than 400 pounds in the typical home.
As we enter a new era of energy transition, the extensive use of copper is anticipated, ranging from fueling electric vehicles to generating renewable energy. Consequently, there will be a significant surge in global copper demand. According to S&P Global Market Intelligence, annual global copper demand is projected to nearly double to 50 million tonnes by 2035.

Copper prices have recently been driven by optimism about demand from energy transition applications such as electric vehicles, renewable energy, and new technology.

Electric vehicles: Copper is a significant component in EVs for electric motors, batteries, inverters, wiring, and charging stations. Electric vehicles use more than twice as much copper as gasoline-powered cars. The demand for copper due to EVs is expected to increase by 1,700 kilotons by 2027.

Renewable energy: Copper is a highly efficient conduit. Various renewable energy sources, including solar, hydro, thermal, and wind energy, require copper in their systems to generate power. It requires six times more copper in renewable energy systems than traditional ones. According to an industry-funded study by S&P Global, achieving net-zero carbon emission targets requires 50 million metric tons of copper by 2035.

Another contributing factor to the surge in copper prices is the current supply shortfall. Supply constraints occur due to tightening mining regulations, geopolitical tensions, and mining labor strikes.

The Cobre Panama copper mine, which belonged to Canadian miners First Quantum, was ordered to close by Panama's current government last year after public protests over environmental damage from mining in the country. First Quantum's CEO is preparing to negotiate with the government after the country's election in May. Cobre Panama accounted for about 1% of global copper output.

Goldman Sachs warned that regulatory approval for new copper mines has fallen to the lowest level in a decade. This is an ominous harbinger, as mines often take 10-20 years to obtain permits and build. Additionally, the mining sector has underinvested for several years, especially during the pandemic. McKinsey estimates that finding additional copper and nickel will require huge expenditures by the mining industry, ranging from $250 billion to $350 billion by 2030 to meet demand.

Therefore, the fastest way for copper miners to obtain natural resources is through M&A activities. The largest industry takeover proposal just occurred: BHP has proposed a $39 billion takeover of its rival Anglo American; unfortunately, Anglo American rejected the offer.

Accelerating demand coupled with a supply gap has propelled copper prices up by approximately 16% this year. However, traders are concerned about China's stumbling economic growth, ultimately overshadowing the positive catalysts. Macquarie estimates that Chinese copper demand growth will slow this year to 3.9%, down from 6.7% last year. Copper inventories are piling up, and spot prices are trading at a discount to futures.

Another key measure—China's premium on imported copper—has just sunk to zero. This indicator reflects the regional premium paid on top of LME copper prices for the physical delivery of copper cathodes into China. This indicator dropped to zero implies that China's copper traders have been reluctant to buy the metal due to weak downstream demand.

What is Copper ETF?For retail investors seeking exposure to the copper market, Copper ETFs present an accessible and diversified investment avenue. Copper ETFs are baskets of stocks that provide exposure to companies or futures that operate in the copper industry. There are two types of ETFs in general.

Copper miner ETFs: These ETFs do not hold the metal directly. Instead, they hold a portfolio of mining stocks that derive a significant portion or all of their revenues from copper exploration, development, or mining

CopperfuturesETFs: These ETFs also do not hold the metal directly. Rather, they use derivatives called futures contracts, which are agreements to buy and sell copper at a predetermined price in the future, hence the name.

Remember, copper ETFs are diversified and highly liquid; commodity prices or related assets can be volatile, especially during an economic downturn. As an investor, you must carefully consider your risk appetite and asset allocation before investing.