Inside the scramble for copper: Can prices rise another 50%? 

Metals prices are glowing red-hot right now, producing massive windfalls for investors who caught the commodity wave.

The gains have been colossal. The gold price, for instance, has climbed 67% to $4,595 an ounce over the past year, silver has tripled to $90 an ounce, and tin has climbed more than 20% this year alone to nearly $52,000 a ton.

But it is copper that has really grabbed everyone’s attention, underpinning an almost unseemly scramble of takeovers. Over the past year, the red metal – which is used in everything from plumbing to electrical wiring, electric vehicles, wind turbines, solar panels and even pesticides – has climbed 43% to $13,310 a ton.

Copper’s rally in the past three months means it has already blown past JPMorgan’s November predictions that it would average $12,500 a ton by the second quarter. JPMorgan’s full-year price target of $12,075 a ton is now looking decidedly demure.

So why have prices risen so hard, so fast – and is this a bubble, or the start of something more fundamental?

Dawid Heyl, a highly-rated portfolio manager at asset manager Ninety One, says copper’s rise is due to two central reasons: a steep rise in demand, and a recognition of how little supply there really is.

Last year, demand for copper grew at just over 3%, but this is expected to intensify, as it is an essential metal for data centres, which are powering the boom in AI.

Nor is there a surplus of copper mines set to pump new supply into the market. Last September, Indonesia’s Grasberg copper mine – the second-largest in the world – was forced to declare force majeure after a fatal mudslide, and is only due to reopen after March. Other large mines in the Democratic Republic of Congo and Chile have had issues too, which Heyl says added impetus to the rally.

Tight supply, high demand

So how serious is this supply deficit? Well, according to JPMorgan, the deficit this year sits at 330,000 metric tons. But this comes at a time when there has been what Heyl describes as a “step-up” in demand, which could grow by up to 4% in future.

Little wonder, then, that the allure of copper assets has fuelled a new round of deal-making, with Rio Tinto’s courtship of Glencore coming months after Anglo American announced its merger with Canada’s Teck Resources.

So how much scope is there for prices to keep rising?

“There is a point at which prices become a bit high,” says Heyl. “I don’t think it’s unaffordable [but] it’s done a lot.”

He believes the market will probably “loosen up” later this year, as mines like Grasberg come back on stream and new supply hits the market.

The problem is, it takes an exceptionally long time – up to 18 years – to bring a copper reserve to full production. But for those with existing copper assets, the high price means it is economically rational for them to mine far more of their ore, the point of inflexion known in mining circles as the “cut-off”.

Copper 360 CEO Graham Briggs explains: “If you’re mining an orebody and the price is $9,000 a tonne, a miner may be operating at a 0.7% copper cut off. With the increase in the price, suddenly you can mine at 0.5% so you’re gaining a big percentage more tonnage that you can mine, assuming your costs are static.”

Once you do that, costs come down “because with the same infrastructure, miners can process more tonnes, and get more copper even at lower grades”, he tells Currency.

The forgotten housing factor

The old cliché in investment circles is that the cure for high prices is high prices. So are investors getting ahead of themselves, especially if more supply comes into the market that much quicker from existing copper miners?

Maybe, but maybe not. Briggs, who took over at Copper 360 last year to sort out the junior miner’s capital crunch and bring its Northern Cape operations into production, says all signs point to a “dramatic” increase in copper usage – and not just because of AI, or green energy. It’s a lot more prosaic than that: houses.

“We haven’t been building,” he says. “If you look at how many houses have been built in Great Britain or Canada or New Zealand or Australia; everywhere you look there’s a shortage and houses require a lot of copper,” he says.

Yet the green energy drive is profoundly important, too. Each electric vehicle, for example, needs two to three times more copper than internal combustion engines. According to a recent report from Crux Investor, electrification and decarbonisation now represent about 30% of total copper demand, “up from negligible levels historically”.

And then there is the China factor.

As the JPMorgan report on copper says: “During previous copper rallies, domestic demand for copper fell, and Chinese smelters were incentivised to export their products instead. However, the fundamental setup looks different this time round.”

Rather, says the investment bank, more “acute supply disruptions” are most likely here to stay for a while, which will limit China’s ability to simply wait for higher prices. “We do think there will come a point soon where China will likely have to reluctantly increasingly buy into stronger copper prices,” it says.

A real price fall

Crux Investor says that as much as we’re talking about a surge in copper prices, if you reprice copper according to gold and rebase them to the year 2000, prices have actually fallen 60% since August 2020, and are down 80% from their historical peak.

In other words, talk of copper prices soaring another 50% to $20,000 or even to $30,000 isn’t as outlandish as it seems.

Heyl warns, however, that “time horizons are important” when it comes to assessing the likely rise. “The incentive pricing is going to be spread between the price that you sell the copper for and the cost you incur mining it,” he says.

Or put more bluntly, these sorts of prices are reflective of what the major mining companies – like Anglo or BHP or Glencore – will be spending over the next decade to bring new mines on stream.

As Crux explains: “The industry’s mature economics require massive capital investment simply to maintain current production levels, with major producers like BHP experiencing declining output despite multibillion-dollar spending … These dynamics point towards sustained higher prices potentially reaching $20,000-$30,000 per ton … to incentivise the supply required to meet electrification-driven demand growth.”

So, don’t expect a massive price increase immediately. But however it plays out, it seems that copper should form a part of most portfolios – provided investors are choosy where they get it from.

Ninety One’s Heyl, for instance, says he spends plenty of time sifting the best copper producers from their less distinguished peers. Locally, Ninety One likes both Anglo and Glencore, and internationally it has Antofagasta, Lundin and First Quantum in its portfolios.

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