Long uptrend predicted for copper as demand for green energy intensifies

Long uptrend predicted for copper as demand for green energy intensifies

20 May 2021 from Sijoitustieto

Copper is expected to play a significant role in the future green economy.

Copper is an important material both in the charging stations of electronic vehicles and in the electronic cars themselves. One electric car contains about 80 kilograms of copper, which is four times more than a conventional internal combustion engine car. Cables made of metals are still the most cost-effective option for transmitting electricity from solar and wind sources to the power grid.

Analysts at Goldman Sachs call copper the “new oil”, and they don’t believe in moving away carbon-based energy without copper.

Copper scarcity may continue to intensify as demand for green energy is expected to rise fivefold this decade, according to Goldman Sachs Commodity Analyst Nicholas Snowdon. He believes the sharply growing demand will lead to a significant shortage of copper around the middle of the decade, according to the Northern Miner article about Goldman Sachs stance on copper in the coming decade.

With copper now trading at around $4.50, Snowdon believes its price will rise to $6.80 by 2025. Bank of America commodity strategist Michael Widmer believes copper could potentially rise to six dollars as early as this year.

Source: MacroTrends.net
Note: Historical returns are not a reliable indicator of future returns.

The biggest risk to the price of copper is the unexpected difficulties in the global economy. From the graph above, one can clearly see the huge drop in the price of copper caused by the financial crisis. It remains bright in the minds of copper miners as they prepare for this decade’s peak in demand with price risks. China’s role is critical, as its demand accounts for half of global demand.

Uses cases for copper

Copper is a metal that can be shaped like gold and silver. While gold and silver are among the precious metals, copper is included in the base metals.

Archaeological finds indicate that copper was one of the first metals used by humans 10,000 years ago. In West Asia, copper was used to make coins and ornaments.

Copper remains an important metal to this day. It is the best conductor of electricity of all the non-precious metals. It is used in cables, generators, motors and transformers. Copper is also widely used in the production of electronics and components. In homes and buildings, copper has value in plumbing and wiring. It is also used in machines, vehicles and coins.

Copper production

The largest copper quarries are located in Chile, Australia, Peru, Mexico and the United States. The copper reserves of these countries account for 65% of the world's deposits.

To date, about 700 million tons of copper have been mined. A further 2.1 billion tonnes are known in the known deposits and the amount of undiscovered copper resources is estimated at 3.5 billion tonnes. Approximately 21 million tons of copper are mined annually.

Copper is moved around the world as ore, crude copper, refined copper and wire.

Chile and Peru are the world’s largest exporters of copper ore, while China and Japan are the largest importers. Zambia exports the most raw copper, with Switzerland being the largest importer. Germany is an active exporter of copper wire.

Trading and importance as an indicator of the global economy

Copper is traded mainly on the London Metal Exchange (LME).

The price of copper largely reflects the growth forecasts of the global economy.

Copper is considered the king of base metals, as it is the most widely used metal as both emerging and developed economies grow.

At the beginning of 2020, a supply deficit of 53,000 tonnes was forecast for copper. Thanks to the global pandemic, the forecast was revised to a surplus of 200,000 tonnes as demand collapsed. The situation perfectly illustrates the importance of copper as a predictor of economic growth.

At a time of high prices in 2011, the price of copper peaked at $4.50 per pound. As prices rose high, users switched to alternatives such as aluminum. Aluminum can replace copper in car radiators, cooling pipes, electronic products and power cables. Optical fiber replaces copper in telecommunication products, plastic replaces copper in pipes.

Copper can also be recycled and recycled copper is constantly being added to the global supply. In 2019, the amount of copper recycled in the U.S. corresponded to 160,000 tons, or about nine percent of US consumption.

Factors affecting copper prices

In addition to supply and demand, the price of copper is affected by the following factors, among others.

US Dollar - Like other metals, the price of copper is negatively correlated with the price development of the greenback. As the dollar falls, the price of copper rises, and vice versa. The correlation is not, of course, a perfect one-to-one relationship, but is high anyway. The reason for this phenomenon is the pricing of copper in dollars. As the dollar depreciates, the buyer has to pay less in their own currency to buy a certain amount of copper. This will lead to an increase in demand and eventually an increase in the price of copper.

Oil - Copper refining involves smelting metal to remove impurities. The smelting process requires a huge amount of energy and also accounts for a large part of the cost of copper refining. For this reason, the price of copper is strongly correlated with the development of oil prices. Renewable energy sources are growing in popularity and could cause a reversal in the price correlation between copper and oil.

Recycling - According to the Copper Study Group, scrap copper is responsible for a third of annual copper use. During the financial crisis, a sharp drop in the supply of scrap copper helped the copper market rise after prices collapsed. Information on the amount of scrap copper is difficult to collect. In general, the supply of scrap metal decreases as economic activity slows, people change cars and air conditioners less frequently.

Speculation - Like other commodities, speculation can have an effect on the price of copper, at least in the short term. Recently, the activity of Chinese hedge funds has increased as China launches the futures market for copper. Thanks to China’s huge demand for copper, China’s futures market can sometimes lead the global copper price developments.

Inventories - It is perfectly normal for the price of copper and the amount of inventory to move in different directions. When copper producers don’t like the price of copper and conclude that they earn more by waiting, they put their production in stock and expect better price levels. As prices rise, inventories are emptied into the market.

In Finland, you have an opportunity to participate in copper futures price fluctuations with the help of Vontobel certificates.

If you believe that the price of copper futures will rise, Vontobel's BULL KPRI X5 V1 certificate offers a tool to pursue returns in rising market conditions. If the price of copper futures rises by one percent intraday, the value of the certificate will increase by 5 percent. If, on the other hand, the price of the futures falls by one per cent, the certificate incurs a loss of five per cent.

If your view of the short-term price development of copper futures is negative, you can aim for returns with Vontobel’s BEAR KPRI X3 V1 certificate. The certificate yields a three percent profit as the price of copper futures falls by one percent. If, contrary to expectations, the price of copper futures rises by one per cent, the loss on the certificate will be three per cent.

Discuss copper trading more on the Sijoitustieto Forum.

Legal notice

This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

The products are not capitalprotected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.

26/01/2022 06:41:34


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