A reputation as ‘sustainable’, new renminbi contracts and booming infrastructure spending in China just sent copper prices to a 2 year high.
- The copper price has risen over $7000 per tonne on the LME to reach a new 2-year high, it has risen over 10% this year
- Its importance in building electric vehicles and wind turbines makes copper a ‘sustainable play’ for ESG investing
- Chinese renminbi-denominated copper futures started trading in Shanghai for the first time this week- they could one day be the global benchmark for the price of copper
- DEMAND –> China copper imports have gone through the roof
- SUPPLY –> Chile, which supplies 30% of the world’s copper is dealing with civil unrest that is disrupting mining output
- Risk to the bullish outlook are that neither covid vaccines nor government spending help revive the global economy
Copper has surged this month alongside other cyclical assets on hopes that effect covid-19 vaccines put the global economy on a path to stronger economic growth and higher demand for industrial metals. The commodity had already been faring well this year on booming import demand from China as it ramps up fiscal stimulus to keep the economy afloat. Now, with President-elect Biden at the ready, there is renewed hope that the US too can embark on its own second round for multi-trillion dollar economic stimulus. In Europe too, there are big spending plans.
A 20-year price chart shows copper breaking above a long-term triangle consolidation after finding support at a rising trendline connecting the lows of 2009 and 2016.
Ok, getting copper out of the ground is still a pretty fossil fuel intensive process but the way copper is being used is helping transition the global economy towards renewable energy. Copper is used in electric vehicles, wind farms, solar panels as well as in many other ways including telecoms and water pipes.
Investing with ESG (Environmental, Social and Governance) in mind has become a big theme for 2020 and will likely be even more so in 2021.
For example, UK Prime Minister Boris Johnson just announced plans for a Green Industrial Revolution to help lift the UK out of its pandemic and Brexit-induced malaise. The British government will spend £12 billion in areas including renewable energy, nuclear power both of which are building and commodity-intensive.
Aside from whether demand for physical demand for copper picks up as a result of ESG investments, just from a sentiment point of view, copper is now seen as a "sustainable" play, which is one of the most vogue area in investing and seen as a megatrend or big theme that many investors want to be a part of.
To read more about ESG investing, check out our article Top 10 most widely held stocks in ESG investment funds
China copper futures
The launch of renminbi-based copper contracts is the first available directly to overseas investors and follows equivalent initiatives in other commodities like crude oil and iron ore. The contract serve a dual purpose for Beijing of having a greater influence on pricing and expanding the use of its currency internationally to compete with the dollar. For us as investors, giving China greater access to the commodity market that it is the biggest consumer of should add to trading volumes and increase opportunity.
Demand = China
This year copper has been the exception to the rule of cyclical and economically sensitive assets drastically underperforming because of the global recession brought on by the pandemic. There is one clear reason for this, China.
In July, China copper imports hit a record high of 762,210 tonnes after the government in Beijing turned to massive infrastructure spending such as building bridges, roads and railroads and expanding 5G internet connectivity to stimulate the economy. By October, China had imported more than the whole of 2019. The policy of huge stimulus is a step away from China’s longer term goal of moving away from its export and infrastructure-dependence to a more consumer-led economy.
Supply = Chile
Copper has also been supported on the supply-side thanks to disruption in Chile where civil unrest has seen strikes and other means by which to slow the output of copper. Chile represents 30% of global supply so its production makes a difference. The price of copper is probably more ‘elastic’ than might otherwise be the cae because supply has been so tight in the past few years, neatly fitting demand with deficits and surpluses in the range of 50,000-200,000 tonnes.
The biggest risk moving forward is quite frankly that some of the predictions for what 2021 and beyond will look like don’t come to fruition. For the moment, metals demand outside China is still well below 2019 levels so it relies on circumstances changing for demand to improve.
Goldman Sachs is bullish copper and other commodities. Goldman analysts have cited a weaker dollar, inflation and additional monetary and fiscal stimulus as reasons for a potential rally in commodity prices. If these things don’t materialise, copper prices need to adjust lower. Probably the most uncertain of these variables is the US dollar. The buck has been sold off heavily since Fed policies including dollar swap lines to foreign central banks reduced the demand for dollars in the open market. However, should markets turn heavily risk-off gain; the dollar is the main haven asset.
Talking of havens, copper has started to outperform gold as economic expectations rise. The relative performance of these two assets will be an important tell for how well copper – and the global economy holds up.
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