It’s been a great year for commodities.
Take iron ore or oil prices. They’ve both doubled since this time last year.
Timber, agricultural goods, copper — they’ve all been increasing after plenty of stimulus around the world kicked in to stave off the pandemic.
All these fast moves in commodity prices and record stimulus are fuelling inflation fears. But even then, there is no doubt that commodities are having an amazing run.
Of course, 2020 wasn’t your typical year. The pandemic disrupted mining operations, transport, and supply chains.
And it was in particular a tough year for oil. In the case of oil, oil prices fell spectacularly last year after the pandemic crimped demand.
But while oil prices have been increasing because oil producers have kept supply supressed as demand fell, the same hasn’t happened to let’s say…copper.
Copper hit a new record high a few weeks back. The last time that happened for copper was in 2011 on the back of China’s massive urbanisation development in the early 2000s.
But things could get quite interesting for copper from now on, especially identifying the best copper stock to buy.
Copper prices are up 70% since this time last year.
Much of the demand is still coming from recovering economies and China. China consumes half of the world’s copper. But demand is also set to increase from the energy transition.
Governments around the world are getting on board with the energy transition and pledging to shift away from fossil fuels. US President Joe Biden has pledged US$2 trillion for infrastructure and energy.
The energy transition will need huge amounts of copper to electrify the economy. Solar panels, wind turbines, batteries, charging stations — they will all need copper. So will electric vehicles (EVs). The global EV fleet is expected to increase by 30% a year to 2050.
So, demand is likely to ramp up from the energy transition, at the same time supply is looking shaky.
The energy transition will need plenty of investment in copper to fill the gap. From Bloomberg:
‘The copper industry needs to spend upwards of $100 billion to close what could be an annual supply deficit of 4.7 million metric tons by 2030 as the clean power and transport sectors take off, according to estimates from CRU Group. The potential shortfall could reach 10 million tons if no mines get built, according to commodities trader Trafigura Group. Closing such a gap would require building the equivalent of eight projects the size of BHP Group’s giant Escondida in Chile, the world’s largest copper mine.’
But there hasn’t been much movement, not even with higher copper prices. As Nick Snowdon from Goldman Sachs Research said recently in an interview:
‘Over the last 12 – 18 months we’ve not seen a single, new major copper project being approved. So, despite this very powerful green demand narrative, despite also very high copper prices, it’s a complete state of inaction from the supply side. And so, that really means this supply crunch is becoming very real.’
And then, there’s also a lot of supply uncertainty coming from the largest copper producers.
As I’ve mentioned before, Chile is discussing setting a royalty on copper miners. Chile is the largest copper producer in the world.
But things are also getting quite interesting in Peru, the second largest copper producer in the world.
It’s election time, and their presidential race is getting quite tense. Counting is still going on, but at time of writing, polls are giving the lead to Pedro Castillo, who has promised to tax up to 70% of profits from companies mining in the country to pay for education and healthcare reforms.
Chile and Peru make up 40% of global copper mining, and all this uncertainty could deter new investment in copper.
Something that BMO metals echoed last week in a note:
‘Peru is the world’s second largest producer of copper, silver and zinc, and a significant supplier of many other metals. Until there is greater certainty as to the political situation and implications for the mining industry, BMO Metals does not expect to see many long-dated projects approved for development by mining companies.’
Demand for copper is rising as economies recover, and from the energy transition. At the same time, there’s plenty uncertainty about supply.
So, keep an eye out on copper.
For Money Morning