Copper’s recent decline looks to be a temporary setback, as the industrial metal readies for a potentially significant supply shortage in the coming years.
Copper remains a “long-term play”—a “direct beneficiary of the move to electrify everything in our lives,” says Frank Holmes, chief executive and chief investment officer of U.S. Global Investors. The metal is used in everything from electric vehicles to renewable energy. “Very soon, the industry will be operating in a deficit,” he says.
Copper futures HGN9, +0.20% settled at $2.772 a pound on Thursday, with prices looking at a fourth straight weekly decline. Year to date, they’re up over 5%. Copper is currently at “its most undervalued since late October 2018, based on its 14-day relative strength index,” says Holmes. “With that in mind, I would call it a no-brainer buy at $2.65 a pound.”
In recent comments at a mining conference, a Tesla Inc. TSLA, -1.02% representative said the electric-car industry could see a long-term shortage of some electric-vehicle battery components, including copper, and stressed the need for investment. The market will see copper mines come online this year in the U.S., Africa, and elsewhere, says Holmes. He owns shares of Ivanhoe Mines Ltd. IVPAF, +1.73% which he says is “nearing the start of production” at its Kamoa-Kakula project in the Democratic Republic of Congo.
Overall, however, investment hasn’t kept up with consumption. “Supply growth is not accelerating as fast as global demand,” says Holmes, citing data from commodity analysis firm CRU Group, which expects copper supply to come up short by 41,000 metric tons in 2021 and 270,000 metric tons in 2023.
In the U.S., infrastructure could be moved to the top of the government’s priorities, “which would be a boon to copper and other base metals,” he says. President Donald Trump and Democratic congressional leaders tentatively agreed to a $2 trillion infrastructure plan—but that is a very long way from reality.
Meanwhile, the copper industry has suffered from years of underinvestment, says Alastair Munro, an analyst at commodity broker Marex Spectron, pointing out that Chile copper miner Codelco recently announced its lowest quarterly production data in about a decade. For now, he says, the “currently bullish supply outlook is more than offset by an absence of real demand,” notably from China, though in the longer term, “prices at current levels are likely to prove cheap.”
Copper has outperformed silver prices so far this year, but other industrial metals, including nickel and zinc, have seen more significant price gains. “Copper prices have underperformed in recent weeks as trade tensions continued to simmer, the dollar rallied to fresh two-year highs,” and some economic data underwhelmed the market, says Tyler Richey, co-editor at Sevens Report Research.
The metal is “beginning to more notably underperform other risk assets, and if other trade talks fall apart, expect futures to turn negative for the year in a hurry,” he warns. That said, Richey believes copper is “pretty fairly priced” right now, mainly because of “uncertainties regarding where we are in the economic cycle.”
Going forward, the most important levels to watch are the low end of the 2019 range at $2.60 and the high end at $2.97, which serve as resistance levels, says Richey. “A break through either one of those zones would suggest that a new medium-term trend is in the early stage of formation.”