Copper prices are up 20% year to date, supported in part by a rebounding economy in the U.S. and other parts of the world as the pandemic comes under control.
Improving economies are key to copper demand since it’s an industrial metal that’s a good conductor of electricity. Copper is found in a host of items from air conditioning units and televisions to cars. The base metal may also benefit from President Joe Biden’s infrastructure plan and the growing appetite for electric vehicles.
That’s spurred investor interest in the red metal, but buyers need to do plenty of research. Commodities are unlike traditional stock and bond investing, as these markets have different fundamental drivers that affect pricing.
Here’s what to keep in mind when considering copper investing:
— Supplies are low as demand increases.
— How to invest in copper.
— Is copper a good investment?
Supplies Are Low as Demand Increases
During the depths of the global recession in March 2020, copper fell to its lowest levels since 2016, but since then has rebounded to trade around $4 a pound, doubling in price. Most of the gains have come in the first quarter as demand rebounded. Because of copper’s commercial importance, the price is never going to fall to zero.
Over the past five years, copper prices roughly traded between $2 and $3 a pound, but prices broke above the $3 level in the fourth quarter of 2020.
Copper’s recent gains come from both a supply crunch and increasing demand. Copper mines were shuttered for part of last year because of the pandemic, which limited production.
Wei Li, global chief investment strategist at BlackRock Investment Institute, says copper’s supply issues also come from years of underinvestment by major miners who were judicious in how much capital they spent on projects.
Many industrial commodities such as copper are benefiting from the reflation trade in the pent-up demand for goods.
Copper is widely used in housing, which is seeing strong demand, and for all things related to working from home, says Rob Haworth, senior investment strategy director at U.S. Bank.
Li says copper may benefit from structural demand changes, specifically the move to the decarbonization of power systems and rising demand for electric vehicles. “(These) will be massive endeavors requiring a large-scale build-out of new infrastructure,” she says.
Experts say Biden’s infrastructure plan could also increase copper use.
“How much of that becomes law, I don’t know. But the direction is still that we’re going to need more copper,” says Peter McNally, global sector lead for industrials, materials and energy at Third Bridge.
McNally points out that when it comes to copper and electric vehicles, it’s not about the battery chemistry, but the wiring in the vehicle to make the motor run. Biden’s infrastructure plan also includes EV-charging stations that would use copper.
[Read: 7 Electric Vehicle ETFs to Buy]
“It’s not just about electric cars, it’s about building the infrastructure to fuel them,” he says.
How to Invest in Copper
There are several mining companies where copper is a significant part of their businesses, including BHP Group (ticker: BHP), Rio Tinto ( RIO), Southern Copper Corp. ( SCCO) and Phoenix-based Freeport-McMoRan ( FCX).
On the ETF side, there are only two pure-play vehicles, United States Copper Index Fund ( CPER) ETF and iPath Series B Bloomberg Copper Subindex Total Return ETN ( JJC), which is an exchange-traded note and is a debt vehicle.
Is Copper a Good Investment?
Analysts see prices trending higher, but that doesn’t mean values will rise in a straight line. Commodity prices are much more volatile than traditional stock prices, too.
McNally says that sometimes strong commodity prices can be negative for a company’s stock. “If a major mining company has a problem, like cost overruns or delays, the stock price usually goes down, and if it’s a big enough impact on balances it can make (commodity) prices go up,” he says.
From a sustainable investing perspective, mining has a lot of risks because of the environmental damage it causes.
“The increased focus on sustainability could make new mining projects more expensive and time-consuming to build, potentially aggravating the supply shortage and driving prices higher to ‘incentivize’ greater production,” Li says.
McNally also pointed out that last year Rio Tinto took a hit from environmental, social and corporate governance investors when last year it blew up a place sacred to indigenous people in Australia and the CEO and two others were fired. “That ESG overhang is a big deal,” he says.
Commodities can diversify a portfolio, but given the price volatility, Haworth recommends keeping the position to 3% to 5% of your portfolio at most. Commodities can also offer some inflation protection.
Haworth says that unlike the last commodities super-cycle that was defined by strong Chinese demand at any price, this time he believes the producers might be able to ratchet up production in a timely way to meet demand. That could suggest investors should look to buy the equities, rather than the metal outright.
It can take 12 to 18 months for a mine to come into production, so investors who buy equities may also reap the dividends the companies pay when demand rises.
“We’d look more to the miners and the producers probably at this point than we would look to try to own the commodity itself,” he says.
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