When copper prices soared to a record high of over $11,000 per tonne in May, some investors were making bold calls for $20,000 a tonne.
Copper bulls pointed to a looming global shortage in the critical metal combined with rising demand due to copper’s role in the energy-transition and data centres required to power artificial intelligence.
Investment funds and traders were speculating that the supply shortfall would cause a long-term upward pressure on prices.
This included renowned investor Stanley Druckenmiller, who said in a CNBC interview: “Copper is a pretty simple story, takes about 12 years, greenfield to produce copper, and you got EVs, the grid, data centers, and believe it or not munitions.”
“These missiles all got enough copper in them and the world’s getting hot that we just think the supply-demand situation is incredible for the next five or six years.”
However only a few months later, prices have since tumbled 20% despite not much changing the driving narratives for the bull case.
Meanwhile, the world’s largest copper producers continue to reduce their copper production estimates in the face of demand for the metal still set to structurally increase.
Indeed, copper was one of the driving forces behind what would have been the biggest mining acquisition in history until BHP Group walked away from the planned $49bn deal to buy rival miner Anglo American for its copper assets.
High prices cure high prices
However, the case for copper is far more complicated than just demand and supply, as Alexandra Symeonidi, an analyst at William Blair points out.
Firstly, she said that high copper prices typically lowers demand in China – a critical market for the metal.
“China doesn’t need to buy copper at high prices,” she told FSA in an interview. “High prices usually disincentivize Chinese buying of the metal in the short term.”
“China makes up more than 50% of demand for copper and actually for almost all metals, so it is a very important market.”
She added: “China has been known to buy the dip when prices are low. We rarely see China buy more metals when prices are high.”
Another thing to note is that unlike equities which are usually traded at prices based on long term-expectations, Symeonidi said commodity prices are more a reflection of demand and supply dynamics at the current time.
“What we’ve seen in copper so far is that yes, the market is trading a bit on expectations,” she said. “But we also know that the markets will tighten later on this year and perhaps in 2025.”
This is what is driving the bullish calls for copper prices to rise: supply and demand imbalances that are expected to play out far beyond 2025.
Symeonidi said: “If we look at the picture of supply and demand as we see it currently and drag forward these expectations for the next 10 years, the market does look very short indeed.”
But investors may be underestimating the potential impact of new technologies that allow for less copper intensity, options for copper substitution, and copper’s recyclability, she explained.
Technology, substitution, and recycling
“There will be technologies allowing for lower copper in density in the future in EVs in a lot of applications,” Symeonidi said. “As we have seen technologies that allowed for low for less cobalt intensity in EV batteries, for example.”
Cobalt, a critical component for batteries in smartphones and electric vehicles, experienced its own price surge in 2018 before it subsequently crashed. It has yet to recover its all-time highs.
What’s more, unlike cobalt, in many applications copper can be replaced with a much cheaper and more accessible metal: aluminium.
Symeonidi points out that in electrical wiring, aluminium can often be substituted since it has roughly 60% of the conductivity as copper, but it is much lighter (boding well for EVs).
Finally, copper recyclability is another factor. 20% of copper currently comes from recycled metal.
“If prices are higher. The scrap collection is going to be incentivized,” Symeonidi said.
Although copper scrap collection is currently limited by regulation in some countries, and by insufficient supply chains supporting its recyclability on a large scale, Symeonidi reckons structurally higher prices will incentivise these barriers to be eventually reduced.
Indeed, the whole supply chain needs to be more developed before investors account for copper scrap as a reliable supply source, but she believes higher prices will incentivise it.
Aside from its use in electric vehicles and data centres, copper has long held an important use in financial markets: as a traditional gauge of economic health, under the moniker “Dr. Copper”.
Recent fears of a looming recession have also exacerbated the recent downturn in copper prices and many other commodities.
