Why You Should Be Investing in Copper
If high demand and low supply are the key to long-term investment success, raw commodities could be your next big-ticket item. Following years of underinvestment, this overlooked segment of the market is expected to surge as demand for copper, aluminum and nickel continues to grow.
In the following article, we’ll zero in on copper and provide you with some practical reasons why this commodity is poised for a prolonged rebound.
Demand for Copper Grows
Copper has been described as a relative constant in a changing world due to its input in various industrial and manufacturing processes. The primary metal is not only a key economic driver of emerging markets like Indonesia and Chile, it plays an essential role in electric vehicles. As the global transportation sector slowly moves away from fossil fuels and toward renewable energy, demand for copper will surge.
The market for electric vehicles is expected to grow significantly over the next decade. In addition to Tesla Motors, many of the world’s leading auto manufacturers are developing a new fleet of hybrid and electric vehicles to capitalize on shifting consumer sentiment. The International Energy Agency (IEA) expects there to be 125 million electric vehicles on the road by 2030, compared with just 3.1 million in 2017.
When it comes to overall copper demand, China is still the major economy to watch. Despite being in a prolonged cooling phase, the country’s high population and infrastructure expansion ensure that demand for copper and construction materials will continue to grow. China’s profound Belt and Road Initiative is also expected to ramp up in the near future, which should keep the country’s copper consumption elevated.
The same goes for India, a nation embarking on a major infrastructure drive. The country is also home to some of the world’s fastest growing cities. The combination of urbanization, population growth and rapid economic expansion means India will be one of the world’s largest consumers of primary commodities.
Supply Crunch to Pressure Market
In addition to demand, copper’s acute supply shortage is another reason to be bullish on the metal’s long-term prospects. According to Christopher LaFemina, a mining analyst at Jeffries, copper miners need to spend an extra $50 billion in the next decade just to balance the supply-demand imbalance. This is a massive undertaking given years of underinvestment by some of the world’s leading producers.
As The Wall Street Journal notes, large miners like Glencore PLC, Rio Tinto PLC and Vale SA have all slashed capital expenditures in recent years as a means of increasing shareholder value. Mining deals are also down sharply in the last four years, averaging roughly $40 billion annually compared with $131 billion in 2011.
Historically, commodity prices have been highly sensitive to market conditions. Shortages in supply led copper prices to more than double in 2006 and rise by an additional 50% in 2011. Analysts say spikes of this nature will become more commonplace in the future. Even mines that were recently approved won’t ramp up production for another few years. All signs point to a supply shortage that could last many years.
How to Buy Copper
The easiest way to gain exposure to copper and other primary commodities is through the futures market. Copper futures are available on the Comex division of the New York Mercantile Exchange and can be traded just like gold and silver derivatives. As the following chart illustrates, copper prices are up more than 11% this year.
Copper exchange-traded funds (ETFs) provide another avenue for gaining access to the market. Two popular funds include the United States Copper Index Fund (CPER) and the iPath Series B Bloomberg Copper Subindex Total Return ETN (JJC). For a broader look, the Shares MSCI Global Metals & Mining Producers ETF (PICK) tracks investment results of global companies engaged in mining or production of diversified metals.
Physical copper bars are also available but lack the same investment appeal as gold and silver (largely because copper is not viewed as a safe haven but rather as an industrial commodity).
In any case, copper prices are likely heading much higher in the future. Investors who gain exposure to this primary metal not only benefit from diversification, they capitalize on a market that is expected to be out of balance for many years.
Featured image courtesy of Shutterstock. Chart via Barchart.com.