The bull-and-bear debate around the prospects for copper and copper mining stocks, like Freeport-McMoRan (NYSE: FCX), continues to rage on. On the one hand, the bears are pointing to the effect of a slowing economy on demand and the sell-off in the price of copper (since May) as merely the start of a longer-term correction. On the other hand, the bulls argue that both the demand and supply are favorable for the copper industry over the long term. Here's a look at both arguments and what investing in copper today looks like a no-brainer investment.
Copper over the last year
It's been a volatile year for the copper sector. The price of copper was around $4.10 per pound a year ago, only to rise to nearly $5 per pound in the spring due to a combination of the supply chain crisis and the onset of war in Ukraine, leading to a greater willingness to pay higher spot prices.
For example, Ukraine is a major supplier of copper wiring harnesses used in the automotive industry. The lack of supply caused automotive production curtailments and a scramble to secure copper supplies. Fast forward to the fall, and the price slumped to $3.45 per pound as the market worried over a global economic slowdown, mainly a decline in China's construction market.
NYSE: FCX
Key Data Points
China is traditionally seen as the swing factor in determining industrial metal demand and, ultimately, prices. Moreover, copper is always seen as the most cyclical of industrial metals due to its use across construction, electrical networks, general products, transportation, and industrial machinery.
The bull-and-bear debate
As noted in the intro, the bear case stresses the effect of a slowing economy on demand. While that's almost certainly behind the recent decline, the bull case argues that this is a knee-jerk reaction to current conditions, and the near- and long-term picture is far more positive. Demand is seen as growing robustly and creating a demand/supply imbalance favorable to higher prices.
According to an S&P Global report, "The Future of Copper," demand for copper will grow from 25 million metric tonnes (MMt) in 2021 to 49 MMt in 2035, representing a near doubling -- driven by the clean energy transition and copper's use in electric vehicles (EVs). It's a report that's caught the industry's attention, not least because Freeport CEO Richard Adkerson cited it during the company's earnings call in July.
On the supply side, the S & P Global report models two scenarios. The "High Ambition" scenarios models increased capacity utilization and recycling rates, while the "Rocky Road" models static utilization and recycling rates.
Both models result in a copper shortfall in 2035, with "High Ambition" resulting in a 1.6MMt shortfall in 2035, and "Rocky Road" in a 9.9 MMt shortfall. While these models are merely a framework for discussion, they indicate the challenge ahead in meeting forecast demand. The potential pressures on supply growth -- environmental restrictions and regulations, government interference (windfall taxes and royalty rate hikes are politically expedient when prices rise), labor relations issues , etc. -are real.
The long-term clean energy effect
The report, and Adkerson, see demand for copper driven by electrification in the economy. While non-energy transition demand (construction, electrical equipment, consumer products, appliances, etc.) is seen as rising steadily at an annual rate of 2.4% between 2020 and 2025, demand from energy transition applications is seen as growing at much faster rates. As such, investors can think of copper demand as steadily increasing from traditional sources, but with the kicker to marginal demand coming from the energy transition. It's a transition driven by ongoing governmental and regulatory actions.
| Source |
Annual Growth Rate in Demand Forecast 2021-2035 |
|---|---|
|
Solar PV |
11.9% |
|
Onshore wind |
9.8% |
|
Offshore wind |
23.3% |
|
Battery storage |
21.8% |
|
Auto (excluding internal combustion engines) |
14% |
|
Distribution |
2.7% |
|
Transmission |
7.1% |
Data source: S&P Global Research.
China's demand remains robust
As ever, China is key to future demand prospects. The country accounted for 54% of global copper demand in 2021, and its embrace of renewable energy and EVs (50% of global EV production takes place in China) means it will continue to drive demand. As such, it's imperative that copper demand from the clean energy transition offset any decline in demand caused by a slowdown in, say, construction demand.
Fortunately, there's evidence that that's exactly what's happening now. For example, a Reuters article indicates that customers in China continue to be willing to pay a copper spot (the price paid for immediate delivery) premium as demand continues to rise. In addition, inventories at copper warehouses in China are now at historic lows, according to the article.
That viewpoint is supported by Adkerson's commentary on the second-quarter earnings call. Adkerson argued that, despite the fall in prices, inventories in China "were not building," and "we don't see any impact on demand.
If overall demand slacks, you expect to see rising inventories, but the evidence and Adkerson's commentary say the opposite.
Is Freeport-McMoRan stock a buy?
Freeport-McMoRan is still highly profitable at today's price of copper, and the long-term demand outlook for copper looks favorable. Moreover, a flurry of takeover activity in the sector suggests industry insiders are willing to take advantage of the market sale. Investors should look to follow their lead and buy into some of the leading copper mining players, such as Freeport-McMoRan.
