“Copper might be the tightest commodity we have ever seen in history. The prediction that copper could reach US $15,000/t by 2025 could be a conservative estimate.”
– Goldman Strategists
A price of US $15,000/t might seem a little far fetched when the commodity is trading at around US $8,300/t as of mid 2022 but there is a good reason for it.
Foundational Overview
Copper has existed in human civilizations since before the Bronze age. The discovery of the metal’s abilities as an effective conductor of electricity along with its importance in construction and infrastructure transformed its utility from medieval weapons to something of more intricate value.
In contemporary times, while nations battle the war against carbon emissions, the emerging trend has been a shift from a ‘fossil fuel dependency’ to electrification. Whether we source our energy needs from solar, wind or hydropower, it has to be converted into electricity to be used by the masses. The need for copper will increase when we promote electrification since we need copper to conduct electricity and it is irreplaceable when we consider the economics around it coupled with the laws of chemistry.
If we take a look in more specific terms for example, Electric Vehicles are the vehicle of the future and EVs need significantly more copper than conventional Internal Combustion Engine based vehicles.
Where is the demand coming from?
Essentially, demand for copper can be broken down into traditional demand and decarbonization demand. Traditional demand would be the need for copper in conventional sectors like construction which have always dominated the consumption of copper. There is no drastic change in demand from this component. It is decarbonization that will push demand. Presently, the decarbonization demand is around 5% of the total demand of the metal. However, in the coming decade it is estimated to be around a quarter of the total demand for copper.
Crux of the Problem
With demand for Copper estimated to increase significantly, the supply of the metal lags behind. To avoid any confusion, let me reiterate that there is abundance of copper in the Earth’s crust but there is a shortage of new major mines that can sustain the demand. The shortage of supply is brought about by a confluence of factors. So, essentially the problem is underinvestment rather than scarcity.
Back in the mid 2000s there was great demand for the metal largely from China. The miners didn’t leave any effort to match the demand. Soon, recession hit and the demand was vapourized and the oversupplying copper miners were left out to dry. This lesson from the previous cycle has stuck with the sector. Coupled with that, ESG concerns have resulted in underinvestment of the mining industry as a whole while the increase in legalities have lengthened the time taken by major copper producing nations to open mines.
However, the demand from decarbonization seems to be a more fundamental change in how humans live and not a change grounded in macroeconomics. Thus, this future wave of demand is more stable and here to stay.
There are some projects in progress that will increase production from different regions of the world like the copper belt in Africa. This will lead to a small increase in production of the metal. The peak production will be reached in a few years but demand will keep increasing till the end of the decade.
I would draw your attention to the timeline of this cycle. Peak supply to be reached within two years (still not enough to meet demands) while demand keeps increasing till the end of the decade. The average time taken for a mine to reach fruition since its ideation is to be around four to five years. This will result in a severe deficit of the metal for a long time. For which there would be no solution except a hefty increase in prices.
The rise in prices of copper have already begun when the commodity saw a sharp rise in its prices post pandemic. However, the price rise also comes from the pent up demand of global consumption that came after global lockdowns were removed.
Copper Price Dynamics
Before we delve further into future market fundamentals of copper, we must first understand different factors at play. Historically, China has been the major consumer of copper in the world. To such a dominant level that the macroeconomics of China are important to be understood. After the pandemic, copper saw a major rise in its prices based on aforementioned market fundamentals but presently its prices have seemed to reach a plateau this year.
*The red zone represents the plateau of prices of copper in 2022.
There are three major reasons for the following:
Chinese Scenario: Chinese Real Estate which takes up around 9% of the global copper consumption has shown signs of slowing down. Along with that, the economic growth rate shown by China has fallen.
Fears of Economic slowdown: With major economies around the world tightening their monetary policies, there is a chance of global demand slowing for base metals.
Rise of Energy Prices: With the rise in energy prices it might lead to slowing down global consumption, the demand for copper and other base metals will follow suit.
However, these are mid term factors that do not encapsulate the longer term future. As mentioned earlier, the rise in demand for copper is going to be generated from the decarbonization effort of the major economies that are not particularly susceptible to fall in Chinese Real Estate and the rise in energy prices. Real Estate comes under traditional demand which was never in question and decarbonization is essentially a fight against non renewable energy sources.
Along with that, the decarbonization demand comes globally rather than being fixated on China. Since, cutting down emissions is a goal for many nations worldwide. So, this new demand would not be affected greatly with a single country’s position. Albeit, the Chinese will have influence as it has taken significant initiatives to cut down its carbon emissions.
What does it mean for Hindustan Copper Ltd.?
Hindustan Copper Ltd. controls and operates most of the major mines in India. It is also the only vertically integrated copper producer in India. Other copper firms in India concentrate on smelting rather than mining. So, essentially the whole business of mining copper in India falls to Hindustan Copper Ltd.
India does not possess either the production capacity to influence the prices of copper or the demand to influence it. However, Hindustan Copper Ltd. as the major miner in the country is highly influenced by the prices of Copper.
*The candlestick pattern indicates the Copper Prices according to COMEX.
*The orange line indicates the equity prices of Hindustan Copper Ltd.
The information provided above paints a picture of the relationship between copper prices and equity prices of Hindustan Copper Ltd. The relationship does not always come into effect when other market factors influence the Indian equity markets. However, the general trend between the two is clearly visible.
If the upcoming deficit hypothesis predicted comes into fruition in the future then Hindustan Copper Ltd. is likely to benefit from it. However, it is worth noting that copper market fundamentals are not the only factors that affect equity prices, the macroeconomics situation of India as well as global macroeconomic framework are also to be considered such as recessionary fears, outflow of foreign investments etc.