Theoretically, copper’s long-term fundamentals are better in comparison to steel, aluminum, and iron ore. The reasoning is basically twofold. First, copper demand could continue to grow at a modest pace for many years. While the Chinese steel demand has likely peaked, copper demand could continue to grow in China.
Demand and supply
Copper’s wide usage in consumer appliances like air conditioners bodes well for copper demand. Despite the global turbulence, consumer spending hasn’t faltered. Furthermore, the copper demand in renewable energy generation is higher as compared to non-renewable energy generation (XLE). Copper demand should get support from the global thrust towards renewable energy.
On the supply side, copper’s dynamics are different from some of the other metals. Copper doesn’t face massive overcapacity like steel and aluminum. Furthermore, miners need to replenish their falling copper reserves with new mines. Also, copper mines have to be converted into underground operations once the open pit mine nears the end of its lifespan. These activities require a lot of cash and companies need an incentive in the form of higher copper prices to pursue new exploration projects.
According to Freeport-McMoRan (FCX), citing Wood Mackenzie data, we could see copper’s supply fall in the coming years. Some of the world’s largest mines have seen falling ore grades. Escondida, owned by BHP Billiton (BHP), is an example where falling ore grades have negatively impacted copper volumes. Also, some of the other big mines like Freeport-McMoRan’s Grasberg mine in Indonesia (EIDO) need to be converted to underground operations in the next few years. Note that Rio Tinto (RIO) (TRQ) is Freeport’s partner in the Grasberg mine.
Now, the key question is whether copper has underperformed metals despite its better fundamentals. We’ll explore this more in the next part of the series.