If you are looking for a hedge against inflation, it is common to be recommended gold or silver as an investment option. So why not invest in copper?
Well, buying up large quantities of copper bullion is largely impractical. It is also not readily understood what an investment in copper represents.
If you are looking for gold exposure, there are multiple ways for investors to invest in gold. You’re probably familiar with the classic arguments in favor (and against) gold investment. But if you talk about copper, there is far less understanding of the fundamentals of this market.
The reality is that copper is the most useful industrial metal on the planet. We use copper for numerous applications, such as industrial wiring, a conductor of heat, computer components, mobile technologies, the automotive industry, new home and commercial construction are only a few examples.
It can be said that an investment in copper is actually an investment in growth.
Supply & Demand of Copper
The price of copper fluctuates according to supply and demand forces. As we will discuss below, there are numerous applications for copper, it is considered the most useful industrial metal in the world.
So should you be looking to invest in the copper market? It has suffered a greatly in recent years, largely due to an abundance of supply, and an overall lack of demand.
China is the World’s biggest consumer of copper, accounting for over 40% of global demand. The United States and the European Union follow, and India has emerged as the 4th largest global consumer of copper.
China had stockpiled huge stores of refined copper and contributed to a decrease in their demand. And while growth in China has slowed, it continues to remain strong. But aside from the economic growth, China continues to move towards urbanization, a long-run strategy that will take several years, if not decades to complete. This is a positive indicator for increased copper demand.
And while China may be the global leader in copper consumption, India is an emerging consumer. India’s population is expected to surpass China by 2025, and signals within the country indicate reform in favor of improving their current infrastructure and a push towards economic growth.
Another thing to consider is recent rumblings in the United States from their new President. Donald Trump made a proposed $1 trillion (over 10 years) in infrastructure spending a campaign platform, as well as a 40ft, 1900 mile concrete wall along the US – Mexico border. This bodes well for coppers prospects domestically in the United States.
On the supply side, Chile is by far the world’s largest producer of copper, with China a distant 2nd place. In 2014, Chile produced 5,750,000 tonnes of copper, nearly 4x as much as China. There is currently enough production available to meet demand, but the problem is diminishing copper reserves.
While there have been several new copper discoveries since 2000, the grades and scope of each of these deposits have been significantly less than current supply. While economic, new supply is looking to be increasingly expensive to produce.
This indicates a strong case to be made to investors in favor of copper stocks. Companies with advanced exploration projects, in politically stable regions, are attractive targets for speculative resource investors.
Investing in Growth
Copper, along with lead, nickel, and zinc are group together to form a classification known as the base metals. Investors seeking to find opportunities tied to expected growth should look at directly at copper. As we stated before, an investment in copper is often equated to an investment in growth.
Base metals are widely used in commercial and industrial applications because they are both more common and less expensive than other classifications such as precious metals (gold, silver, platinum and palladium).
Construction and infrastructure comprise the largest consumer of copper in the global economy. Accelerated urbanization in China and India translate into infrastructure spending on major urban environments. While economic growth in China may have slowed, the focus on urbanization suggests copper demand will continue to see major demand.
As with China and India, the United States has recently announced the intention to inject $1 trillion into infrastructure spending. Two of President Trump’s campaign promises during the 2016 US Election was a wall along the US-Mexico Border, and a renewed manufacturing sector for American labour.
The $1 trillion infrastructure program is to be carried out over 10 years and will ensure the United States will be able to compete on the global stage for manufacturing jobs. This will include huge resources on buildings, roads, bridges, etc, all of which will require copper.
The proposed US – Mexico border will is projected to be over 40′ in height, and will span over 1900 miles. It is expected that the wall will include electronic monitoring, and will be made of concrete and steel. Copper wiring and piping will be required as part of the construction project.
It is this focus on economic growth, that investors should focus on when looking at copper, and especially copper stocks.
With growing demand for this useful base metal, the search goes on for additional sources of high-grade, economic scale copper deposits.
Multiple Applications
Why is copper so useful? It is critical to so many different industrial and commercial applications.
- Electrical Conduit
Perhaps the most widely well-known application for copper is as a conductor of electricity. It is the second best metal, behind silver, as an electrical conduit but is a much better fit than Ag due to the fact it is readily available and relative price.
This is also why copper demand is tied to construction and infrastructure. New buildings require a lot of copper. The average home contains 439 lbs of copper. Commercial buildings contain several tons.
- Electronics
- Equipment & Machine Manufacturing
Copper is a critical component for planes, trains, and automobiles. In the United States, the average car contains over 50 lbs of copper, a railway locomotive has over 11,000 lbs, and a Boeing 727 has over 9000 lbs.
With a trend towards the production of more electric & hybrid vehicles, subway cars and buses, the copper component rises substantially.
Copper Bullion vs Equities
So, should you invest in the physical metal, just like precious metals like gold and silver?
In this case, No.
Purchasing copper bullion is not convenient for investors. To invest in bullion with any scale, you will require significant space to take storage. The better solution is to invest in copper equities, both producers, and explorers.
With the existing high-grade copper mines depleting their reserves, new discoveries have been of lesser grade, or smaller scale. The opportunity for investors is to buy stock in;
- established copper producers, focusing only low-cost production in politically and economically stable regions.
- small and mid-tier exploration companies at an advanced stage of exploration.
The copper exploration stocks offer the greatest potential reward but will require greater due diligence. While the past several years has thinned the herd, eliminating many of the weaker companies, there is still a lot of noise in the market to distract investors. The key with small-caps is to look for projects of economic scale, with tale
The key with small-caps is to look for (i) projects of economic scale, with (ii) talented leadership teams, with specific skill sets and experience. Bringing a mine into production is highly difficult, and faces a lot of hurdles that requires BOTH a great project, and a talented team.
For investors to put up risk capital to acquire only moderate gains, makes little sense. Exploration projects must offer investors the opportunity reap profits that justify taking such big risks. This is why investors need to focus their attention not on small deposits, or low-grade ore, but rather larger scale mines with higher grades.
Large, high grade exploration projects are critical, but without a talented team to guide the project, the risks still outweigh the potential rewards. Investors need to be discerning when looking at the management team of a company.
I recently did an interview with Rick Rule, and one of his key points when evaluating a junior exploration company was to not just find quality management, but rather management with a specific track record of success. Mr. Rule stated that the management team should have a past success with similar situations.
Conclusion
If you are looking for a sector that will perform in 2017, then Copper Stocks is one are you need to consider. The past few years have seen copper prices hit bottom, and only recent started to rebound.
With global demand showing strong signs of ramping up quickly, and current levels of supply diminishing, the time could not be better for investors who are looking for a sound, long-term investment into growth.
Take a look our list of copper stocks, and remember to sign-up for our free newsletter, where we discuss this topic in far more detail but with the appropriate disclosures and disclaimers in place.