Can copper be a long-term investment?
In the middle of September last year Unhedged wrote about copper. The argument was that the green transition — if it actually takes place — will require a lot of copper for electric vehicles and new power grids, and the outlook for new copper supply does not look deep enough to meet what is needed. Believers in the transition should therefore have exposure to rising copper prices.
Our column made us feel clever. The price of copper rose by more than 25 per cent between September and May, and the stock price of Freeport-McMoRan, the leading copper miner, rose 40 per cent. But, like so many things that make journalists feel clever, the trend did not last. Since the May peak, the price of copper has retraced almost all of its gains.
As FT colleagues wrote last week:
Flagging Chinese demand [have prompted] fund managers to cut around $41bn of bullish bets on natural resources.The sell-off in copper . . . has been particularly stark — it is down close to 20 per cent from its record high in May above $11,000 per tonne . . . Traders’ bullish positions — net of bearish bets — on commodities have dropped 31 per cent, or $41bn, from a late May peak of $132bn to July 30, according to data from JPMorgan . . .Much of the copper bought by China in the first half of this year ended up being stockpiled, rather than used.
Manufacturing industries are in contraction worldwide. China’s housing market has not recovered as hoped. And copper’s AI narrative — the idea that data centres will require lots of it — may have been overblown.
Meanwhile, the long-term case for copper is unchanged. All we have learned is that price volatility and carrying costs make that case very hard to invest in. Jeff Currie, a commodities strategist at Carlyle and former Goldman Sachs commodities chief, thinks another copper supercycle is coming. But, as he argued in a recent note, a change in the structure of the market has made it harder than ever to bet on:
What makes this time different from the previous cycle in the 2000s is the reduced capacity for the market to hold long-term risk on behalf of these industries, which means the investment in commodities to meet this rise in investment demand will need to wait longer until the environment is far more certain.
Post financial crisis capital rules radically reduced the amount of capital that banks would risk in commodity futures markets, making those markets thinner and less reflective of fundamentals. Furthermore, the macro hedge funds that played a big role in commodities markets 10 or 20 years ago have been replaced by algorithmic traders, momentum chasers and “pod” funds with low risk limits. The price impact of supply/demand imbalances are therefore not felt until the imbalances have actually arrived. As Marcus Garvey, Macquarie’s head of metals, told Unhedged: “We have to accept that commodity markets are in a sense still spot markets. They are not really discounting the future.”
For copper investors who are willing to bear the volatility of a myopic market while waiting for the green transition trade to pay off, owning mining equities is the only viable trade. It is the only one with a positive carry. But one wishes that carry were higher: Freeport’s dividend yield is under 2 per cent and its free cash flow yield is less than 3 per cent. Other miners offer better yields, but are higher-cost copper producers or have more exposure to other metals. One consoling thought: the market may well offer more appealing points of entry to the copper trade if the economic slowdown gets worse.