- Copper price is retreating from near ten-year high but is closer to historic peaks than troughs
- Demand for industrial metal seems well underpinned by global need for enhanced power grid capacity and electrification drive
- Miners’ capital investment plans mean supply growth should be modest
- Copper mining shares remain relatively unloved
“A near-term slide of more than 10% in the price of copper from May’s highs may reflect concerns over the Chinese economy, the slower-than-expected pace of demand for electric vehicles or financial markets’ faith that cooling inflation means there is less of a need for hard asset hedges against the falling value of paper money, but the long-term backdrop for the industrial metal still looks positive,” says AJ Bell investment director Russ Mould.
“The globe’s drive to embrace renewable energy and the rise of electric vehicles will both require huge investment in power transmission and distribution, and thus drive demand for copper, while miners are not bringing on a lot of fresh capacity after the lean times in the second half of the last decade. More intriguingly still, copper miners feel very neglected relative to buoyant headline stock market indices.
Source: LSEG Datastream data
“Copper’s malleability, ductility and conductivity mean it is incredibly useful and deployed across a wide range of industries, from construction, to automotive, to infrastructure, and hence the nickname of ‘Dr Copper,’ as it is often seen to be a good guide to global economic health.
“China’s ongoing travails, as it grapples with a real estate bust and finds the path to exporting its way out of trouble at least partly blocked due to tariffs and trade tensions, could therefore be weighing on the industrial metal’s price, even if equity markets worldwide remain convinced that nothing more malign than a soft landing is coming up (if indeed there is going to be any downturn at all). There have also been concerns that China was stockpiling the metal in anticipation of announcements on its currency, which continues to slide, but there is no action to confirm such chatter as yet.
“Sudden and deep weakness in copper could therefore be a concern, as it may flag not just ongoing difficulties in China but in the West too (where some weakness in US jobs and housing markets can now be discerned). That could also weigh on the shares of copper miners too as they, quite understandably, follow the underlying metal’s price pretty closely, given how geared into it they will be. The US-traded Global X Copper Miners Exchange Traded Fund (ETF), which has the ticker COPX and tracks the performance of a basket of forty global copper miners, shows how close the relationship can be.
Source: LSEG Datastream data
“Copper miners have had a good run from the cyclical lows of 2016 and the pandemic-inspired panic of 2020, but they have done nowhere near as well as wider stock markets, especially in the USA, which remains in thrall to technology stocks and AI-related names in particular – even if copper may well be a key enabler of many AI-related themes. Copper will be a key part of the grid infrastructure that provides the power to the data centres and servers that will be providing, and enabling the development of, large language models.
“In fact, copper miners are trading at multi-year lows relative to America’s S&P 500 index, to suggest that if markets really do believe in the AI phenomenon there may be alternative, cheaper ways of playing it rather than piling into NVIDIA.
Source: LSEG Datastream data
“Miners seem all-too aware of the importance that a reliable supply of copper may have in the future, especially as resource nationalism, the risk of asset expropriation by governments and environmental concerns all mean many of them seem reluctant to commit to the development of new mines. The copper price collapse after the capital investment splurge of the early 2010s will also be fresh in the memory of many copper mining executives and they will not want to make the same mistake again (and shareholders in these companies will not want to see that either).
“The aggregate capital investment budgets of five of the largest, publicly-owned copper miners – Freeport-McMoRan, Rio Tinto, Anglo American, Antofagasta and BHP – look subdued compared to a decade ago, and the forecast capex-to-sales ratios of 19% for 2024, 18% for 2023 and 17% for 2026 are not markedly different from the post-2000 average of 17.4%. If demand for copper does take off, there will not be a great onrush of new supply to meet it, given how long it takes to plan, commission, develop and open a mine.
Source: Company accounts, Marketscreener, analysts’ consensus forecasts for Anglo American, Antofagasta, BHP, Freeport-McMoRan and Rio Tinto.
“This reticence to invest heavily in new mines may also help to explain why BHP tried to acquire Anglo American, in an all-stock deal, even if the approach ultimately foundered on the issue of price. Questions over Anglo American’s overall strategy across its full range of assets mean its shares are lagging movements in the copper price, and perhaps that is where BHP saw opportunity knocking.”
Source: LSEG Datastream data
