Last updated on 14 de March de 2023
Copper is a fundamental metal for the modern economy and energy transition. We discuss the reasons for investing in copper and how to do it.
Content
Introduction
Copper is an industrial or base metal. Therefore, its price is much lower than that of precious metals such as gold or silver. In fact, a ton of copper costs less than $10,000.
However, investing in copper can be highly lucrative. Our modern lifestyle could not exist if we did not have access to this metal. And projects as ambitious and large as the energy transition and the massive adoption of electric vehicles put copper at the center of the economy of the future.
Leaving the energy transition aside, copper is used, among other things, in construction, for things like pipes, wiring or roofing. It is a fundamental metal to produce vehicles of all kinds.
Copper is also present in all types of infrastructure: trains, airports, wind farm and solar panels. Its uses are practically unlimited.
Next, we analyze several strong reasons for investing in copper.
8 Reasons Why We Should Invest in Copper
1) Global Economic Growth
The regions of the world experiencing the highest rates of economic growth are emerging countries. In those places, almost everything is yet to be built. This will require vast amounts of natural resources, including copper.
For example, China has been the world’s largest consumer of copper for several decades. And that has coincided with the transition from a poor country with a mostly agricultural society to a modern country with large urban centers and first-class infrastructure.
If we believe that the rest of the emerging countries will continue to grow over the next few decades, investing in copper should be on our agenda. Imagine the demand for copper that can come from India if growth remains strong in the soon-to-be most populous country in the world.
But it is not just India. Many other countries in Asia and Africa hope to develop their infrastructure and cities in the future. And many developed nations will need to modernize their infrastructure at some point.
2) Demographic Growth
In addition to the economic growth, demographics is another aspect to consider. Forecasts indicate that the world’s population will continue to increase throughout the 21st century.
And the larger the population, the greater the need for housing and infrastructure. Again, another factor that will contribute to increasing copper demand in the future.
3) Real Estate Sector
Even in developed countries, in which low economic growth and population stagnation are expected, real estate demand for copper is likely to remain very strong.
As society adopts new ways of working, and in particular working from home becomes a viable options, there is less need to live in large urban areas. And even within those areas, it becomes less important to live in a central location.
That means many people may choose to move to the outskirts of cities, where they will be able to afford larger homes. This can lead to a boom in the construction sector.
And remember that, if a significant portion of the population goes from living in apartments to living in houses, demand for raw materials, including copper, will increase.
4) Electric Vehicles
The mass adoption of electric cars in many countries is heavily influencing the decisions of many investors. As a result, the price of companies such as Tesla has skyrocketed in recent years. While some of these stocks may be expensive, there are other ways to benefit from the growth in EVs.
This is because electric cars need, on average, a much higher amount of copper than cars with internal combustion engines.
According to Investor Intel, a hybrid car consumes twice as much copper as a regular gasoline or diesel car. And an electric car four times as much. Considering that the automotive sector is one of the largest consumers of copper in the world, this increase in demand can have a dramatic effect on its price.
And that is without considering the potential growth of the car market in countries such as India.
5) Renewable Energy Production
Renewable energy sources will be a key component of the economy of the future. Solar and wind power generation is a priority for most Western countries.
That is going to require a lot of new infrastructure in the form of solar and wind farms. These are built with huge amounts of copper.
By the way, another key metal for generating energy from renewable sources is silver.
6) Stagnant Copper Production
So far, we have discussed trends that will lead to an increase in copper demand, but it is also important to analyze the supply side. After all, prices are set by both demand and supply dynamics.
Commodities went through a very tough time during the decades of the 1980s and 1990s. With prices continually falling, investors stopped putting their money into new projects. And the consequences of those actions are still felt today.
Very few copper mines have been found and developed over the last few decades. As a result, production has not increased enough. That ultimately led to much higher prices.
While it is true that higher prices will attract more capital to finance copper exploration and development activities, we should bear in mind that it takes years for mines to be fully operational. Increasing supply is way more complicated than flipping a switch.
7) Inflation Protection
All the reasons discussed so far for investing in copper point to the same conclusion: copper prices are likely to go up in the future. And perhaps very significantly.
But that leaves the topic of inflation aside. Because copper is a real asset, investing in it is likely to provide good inflation production regardless of the demand and supply dynamics.
Real assets tend to outperform financial assets in inflationary periods, especially cash and bonds. Therefore, adding copper to our portfolio will increase our protection from monetary devaluation.
8) Diversification
Finally, investing in copper will also increase the diversification of our portfolio, which can improve the relationship between potential returns and risks.
Remember that good diversification is about investing in different assets with attractive potential returns, but whose performance is not highly correlated.
As a result, by being properly and well diversified, we increase the likelihood of achieving good returns in the future while minimizing the risk of experiencing significant losses.
How to Invest in Copper
Let us now discuss different options for investing in copper:
Physical Copper ETF
The easiest option to invest in copper if we believe that its price is likely to rise in the future, is to buy the metal. However, buying physical copper is far from convenient.
After all, in 2023, the price of copper is around $4 per pound. It would be almost impossible to invest a significant amount of money if we had to buy the physical metal.
However, it is possible to invest in a physical copper ETF, sometimes called ETP. One of them is the ETF offered by WisdomTree. In exchange for a small annual commission, they will take care of storing the copper for us. We can then buy and sell it freely just like a stock.
That will allow us to book a profit if the price of the metal goes up. At the same time, it limits our risk of losses, since, unlike a company, the copper will hardly be worth $0.
Obviously, it is also possible to profit from increases in the price of copper through the purchase of futures contracts, but keep in mind that futures are financial derivatives that carry considerable risk.
This is because with a small amount of money we can buy a position 20 times greater than our investment. As a result, losses can be substantial and fast if the market moves against us. Therefore, it is way safer to take a view on the price of copper by investing in a physical copper ETF.
Copper Mining Companies
The other alternative to invest in copper is by buying shares in copper mining companies. They are dedicated to exploring for, mining, and selling the metal, and their production costs do not fluctuate much. Consequently, an increase in the price of copper can lead to large profits.
At the same time, a significant fall in the price of copper can lead to a substantial drop in profits. And, if prices get low enough, they could be below production cost and cause losses to those mining companies.
For this reason, investing in copper mining companies usually carries more risk than investing in the metal directly. Nonetheless, this should not frighten you. That is why diversification is so important.
If you believe in the fundamentals of the sector, and that there is a promising future ahead, fluctuations that may occur in the short or medium term should not intimidate us.
The world’s largest copper producers are usually companies that extract all kinds of natural resources, so their exposure to copper is limited. In this category we would find companies such as BHP Group, Glencore, Rio Tinto, and Barrick Gold.
There are also companies dedicated almost exclusively to mining copper. Hence, they may be the best options if we want a more direct exposure to copper. Some examples would be the US company Freeport-McMoran or the Canadian Copper Mountain Mining Corp.
ETF of Copper Mining Companies
The last option for investing in copper is also my favorite: we can buy an ETF of copper mining companies. This can be the easiest way to invest in companies active in the sector.
As a result, we stand to benefit greatly if copper prices increase and the sector’s profits skyrocket, while having enough diversification to not be overexposed to any single producer and the bad news that may come up in the future.
Additionally, thanks to this type of ETF, we do not have to spend time analyzing the different companies in the sector, being able to invest out time somewhere else.
Something to keep in mind about the ETFs of copper mining companies is that some of these companies will also be active in the production of other natural resources, such as gold, zinc or nickel. There is nothing wrong with that. But we must be aware of where our money is invested.
An example of a copper mining ETF is be the Global X Copper Miners ETF.
Conclusion
Copper is an industrial metal absolutely fundamental to our current lifestyle. Chances are, we take it for granted, but our lives would be dramatically different, and worse, if copper was not available.
Due to its properties, copper will be needed by society for many centuries to come. While some sectors may become obsolete due to technological developments, copper production will remain with us.
We have already seen that global copper demand is likely to increase over the next few decades. The development of emerging countries and their urbanization, the mass adoption of electric cars, the buildout of renewable energy infrastructure, or the deurbanization of developed countries. They will all contribute to copper demand.
At the same time, as copper is a real asset, investing in it can add a great degree of inflation protection and diversification to our portfolio.
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And if you want to learn about another base metal whose demand is also set to increase in the future, check out the following link:
Investing in Lithium – EV Commodity Trade
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