The U.S. economy is showing surprising strength, inflation is declining and the Standard & Poor’s 500 index has rebounded about 6 per cent over the past nine trading days. A key holdout in this sunny outlook: copper.
The futures price is down 15 per cent from a recent high in January, to a low of US$3.62 a pound on Thursday. The share prices of copper producers are in a deeper funk. Freeport-McMoRan Inc. (FCX-N), the Arizona-based copper giant valued at US$49-billion, is down 28 per cent over the same period.
That’s disappointing to investors who have bet on the commodity’s central role in the global energy transition. A lot of copper is used in expanding renewable power capacity and building electric vehicles – 69 kilograms in each EV, or more than three times the amount of copper used in traditional gas-powered cars, according to Britain-based CRU International.
The bullish case rests on rising demand for copper as the pace of decarbonization and electrification picks up, underpinning prices. But this case is wobbling right now.
Copper’s slide is worrisome in a broader sense, too. The base metal tends to reflect global economic activity because of its widespread use in housing, manufacturing and industrial applications. The declining price suggests that this activity may be faltering.
“Copper prices typically move in lockstep with global economic activity,” Ed Yardeni, chief investment strategist at Yardeni Research, said in a note last month.
Don’t expect the price of copper to rebound anytime soon. Analysts expect that the key factors weighing on copper consumption – including a depressed Chinese real estate market, a weak European economy and high U.S. interest rates – will linger through much of 2024.
As well, demand for copper-intensive electric vehicles, which looked insatiable last year, is now facing challenges. In October, General Motors Co. abandoned its goal of producing 400,000 EVs over a two-year period by mid-2024, citing weaker-than-expected interest among buyers. And that’s just one manufacturer among many hitting similar issues.
According to Shreyas Madabushi, an analyst at Citi, if 1.3 million fewer EVs are produced globally next year compared with a base-case estimate of 17 million battery-powered vehicles – offset by rising sales of traditional gas-powered vehicles – EV copper consumption will decline by 130 kilotons.
That will contribute further pressure to already weak copper fundamentals at a time when producers are increasing their output.
“We are entering an unprecedented period of growth in supply,” Shane Nagle, an analyst at National Bank of Canada, said in an interview.
“There are a number of large-scale projects that, through the latter half of this year and into next year, are undergoing significant expansions or coming online,” Mr. Nagle said.
Teck Resources Ltd. (TECK.B-T), for example, is targeting copper as a key area of growth.
This backdrop of rising supply and softer demand for copper adds to an already gloomy environment for bets on related renewables. Companies that develop renewable power are struggling with rising borrowing costs and supplier delays. Orsted A/S announced a US$4-billion write-down of its U.S. offshore wind farm projects in the third quarter.
The iShares Global Clean Energy ETF (ICLN-Q), an exchange-traded fund that gives investors exposure to Orsted and other copper-consuming renewable-energy companies, has slumped 33 per cent this year.
Still, patient investors may want to look past this difficult period for copper and instead focus on the potential payoff on the other side. The downturn could be relatively brief if the compelling argument in favour of renewable energy and EVs holds up over the longer term. If economic clouds disperse, the case looks even stronger.
Mr. Madabushi, despite his cautious near-term forecasts, expects that the downside risks are limited. He believes that the rising number of bets against the price of copper suggests that weaker cyclical demand is already being priced in. Longer term, his colleague Max Layton, Citi’s global head of commodities, last month called copper “THE energy transition bull trade.”
Canadian producers, including Teck and Capstone Mining Corp. (CS-T), are well worth a look for investors who want to tap into this trade, though stocks are hardly cheap.
“While we’ve seen some of these headwinds on the demand side play out, the valuations have remained relatively robust,” Mr. Nagle said.
The concern is that rising copper inventories and the persistent risk of a global economic downturn – which have already pushed out some short-term investors – could eventually send long-term investors running for the exits as well.
A steeper selloff would offer a great buying opportunity. For now, though, copper is sending a clear signal: The next several months could be rough.
David Berman