Summary

• ‍Copper's Industrial Role: Copper has historically been essential in industrial progress, from steam engines in the Industrial Revolution to modern electric vehicles (EVs).‍
• China's Consumption: China consumes over 50% of the world's copper, driven by construction, EV sector growth, and renewable energy investments.‍
• Global Supply: Australia and Latin American countries are major copper producers, with disruptions like labor strikes affecting global supply.‍
• Copper in EVs: Each EV uses about 80 kg of copper, significantly driving demand due to its critical role in batteries and charging infrastructure.‍
• Market Dynamics: Copper prices are influenced by China's demand and global supply constraints, with projections indicating continued price increases due to demand outpacing supply growth.

In the maelstrom of global equity market volatility, with Japanese stocks tumbling over 12% on Monday and clawed back over 11% in the following two trading sessions, investors often succumb to panic selling. They frantically seek alternatives to diversify and hedge their portfolios. While precious metals like gold are the go-to refuge, copper also stands out due to its industrial significance. Copper offers diversification benefits due to its low correlation with equity markets and its essential role in various industries. Although its price can be volatile, copper’s extensive use in construction, electric vehicles (EVs), and renewable energy maintains its steady demand.

Copper: The Lifeblood of Industry and Innovation

Copper has played a crucial role in industrial progress, from the steam engines of the Industrial Revolution to modern electric vehicles (EVs). Its electrical and thermal conductivity, malleability, and resistance to corrosion have made it essential in various applications. During the Industrial Revolution, copper was vital for constructing steam engines and boilers, enhancing efficiency and reliability. Additionally, it was used in textile production, particularly for fabric printing. Despite often being less highlighted compared to iron and coal, copper's contributions have been significant in transportation, manufacturing, and more. Its historical and ongoing importance underscores its role in technological and economic transformations.

China: The Titan of Copper Consumption & BHP Group: The Production Powerhouse

In today's world, China reigns as the top consumer of copper, consuming over 50% of the world's copper, driven by its vast industrial framework and relentless infrastructure growth. This demand is fueled by massive construction projects, a booming EV sector, and substantial investments in renewable energy. The pace of growth in China's manufacturing sector, measured by the Li Keqiang Index (electricity consumption, rail freight volumes, and bank loans), strongly correlates with copper prices, both currently and 3-5 quarters in advance. For example, copper prices surged in the second half of 2020 and the first half of 2021 due to China's rapid growth rebound from the pandemic. However, prices dipped as China's industrial growth slowed significantly since then. The recent price surge in 2024 is due to new initiatives such as the issuance of 1 trillion yuan in ultra-long bonds for infrastructure investment, highlighting China's pivotal role in global copper market dynamics.

On the supply side, Australia, along with the Latin American countries, account for over 50% of the world’s copper production, serving as a powerhouse in the global copper market. Notably, BHP Group, the world's second-largest copper mining company owning numerous large copper mines worldwide, produced approximately 1.4 million metric tons of copper in the financial year ending June 30, 2023. However, the recent labor strikes at BHP's Escondida mine in Chile pose significant threats to global supply. This mine alone churns out over 1 million metric tons annually, accounting for about 5% of the world's mined copper, making it the largest single supplier and a major influencer of global copper prices. These disruptions highlight the fragile balance of supply and demand in the copper market, underscoring the critical role of key producers like Australia and Chile in maintaining stability.

The interplay between China's surging demand and the supply challenges faced by major mining companies like BHP creates a complex global copper market. As China's industrial and infrastructural needs grow, driven by its substantial copper consumption, supply disruptions such as labor strikes in key mining operations constrain availability. This imbalance between increasing demand and restricted supply is expected to drive copper prices upward, highlighting the significant influence of both China's consumption and global mining capacities on the market.

Copper in EV Battery Production

The rise of EVs has significantly heightened the importance of copper. This metal is crucial in EV batteries, motors, and charging infrastructure due to its exceptional electrical conductivity. Each EV typically contains about 80 kilograms of copper, utilized in batteries, wiring, and charging systems—nearly four times the amount found in conventional internal combustion engine vehicles. This increased copper usage underscores its pivotal role in the EV revolution, driving demand and reinforcing its status as an essential resource in the transition to greener transportation.

Market data reveals that global copper consumption for EV production has been growing at an impressive compound annual growth rate (CAGR) of 15% over the past five years. In 2023 alone, the EV sector consumed approximately 1.5 million metric tons of copper, accounting for 6% of the total global demand. Forecasts indicate that copper consumption in the EV sector will continue to rise at a CAGR of 13.7% through 2029, while global copper production is projected to grow at a CAGR of only 2.2% over the next decade. This stark contrast highlights a significant supply shortfall, underscoring that current copper production rates cannot keep pace with the surging demands of the EV industry.

Nickel & Lithium: The Emerging Alternatives

While copper remains the cornerstone for many EV components, nickel and lithium are emerging as significant alternatives, especially in battery production. Nickel’s high energy density makes it ideal for lithium-ion batteries, enhancing energy capacity and extending vehicle range. Nickel-rich cathodes are particularly beneficial in this regard. Lithium, essential for battery electrolytes and anodes due to its lightweight and high electrochemical potential, complements rather than substitutes copper.

Despite these advancements, copper remains more widely used. In 2022, nickel constituted about 19% of the minerals in EV batteries, while copper accounted for 26%. Lithium, critical for battery chemistry, works alongside copper in battery applications rather than competing directly. As battery technologies evolve, nickel's market share is expected to grow, potentially reaching parity with copper within the next decade.

Copper Price Projections and Market Dynamics

The last four months of 2024 have seen significant fluctuations in copper prices, fueled by surging demand from China and constrained supply. China’s aggressive infrastructure and green technology investments have sharply increased copper demand, while major supplier BHP contends with labor strikes and environmental regulations, limiting output. Consequently, copper prices are on an upward trajectory, projected to rise 12% from $8,640 to $9,800 per metric ton between September and December. Analysts predict prices could surpass $10,000 per ton by mid-2025 if this supply-demand imbalance persists. This surge is driven by several factors:

• ‍Increased EV Production: With global EV sales expected to grow 20% annually, copper demand in this sector is projected to rise by 1 million metric tons annually.‍
• Infrastructure Development: China’s domestic projects and Belt and Road Initiative are set to require an additional 500,000 metric tons of copper annually.‍
• Renewable Energy Expansion: The shift towards wind and solar power necessitates substantial copper for electrical wiring and components.‍
• Sluggish Copper Supply: Since 2013, copper mining supply has grown by less than 2% annually and is projected to grow at a CAGR of 2.2% over the next decade, lagging behind the demand growth CAGR of 2.6%.

Conclusion

Copper’s evolution from a cornerstone of the Industrial Revolution to its crucial role in modern technology underscores its lasting significance. As China’s demand and global supply dynamics shape the market, and with the EV industry and renewable energy sectors driving growth, copper's importance is poised to increase. The projected price hikes in late 2024 highlight the ongoing supply-demand imbalance, marking copper as a vital commodity for the future. From investment perspective, the market trend presents a strategic opportunity to diversify and hedge portfolios against equity volatility by considering including copper as a part of portfolio allocation.