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Are You Positioned for a Copper Price Explosion?

Commodities / Copper Aug 27, 2020 - 06:47 PM GMT

By: Metals_Report

Commodities

Independent financial analyst Matt Badiali presents the investment case for copper.

Copper will be the next metal to break out in 2020, and it's all about demand.

The price of copper just broke through $3.00 per pound. The red metal's price rose 45% so far in 2020. But that is still well below its 2011 high of $4.50 per pound.

That could change in the second half of this year.


The reason for copper's looming breakout has its roots in cheap money.

Today, savers take a beating. Government bonds, traditional sources of steady income, are dead. In Europe, bonds cost you money. In the U.S., the yield is less than 1%...which means you lose money to inflation.

That's a disincentive to save. And there is a benefit to borrowing. Interest rates are at or near all time lows. According to Bankrate.com's 30-year fixed mortgage data, our current level of 3.1% is the lowest since they began tracking the data in the 1980s.

The result of that monetary policy is a massive building boom. Construction demand sent the price of lumber soaring:

About 25% of the copper demand comes from construction. That means it is affecting copper demand already.

The demand for copper showed up in warehouse supply recently. According to the London Metals Exchange, the total copper supply in warehouses just hit its lowest point since 2008.

Demand is up and the global pandemic complicated supplies. In South America, where most the world's copper comes from, the coronavirus is starting to take hold.

Initially, giant miners cut staff and worked longer hours to continue to produce. Majors cut staff by around 40%. However, they kept working. And now the coronavirus is moving into the mines.

According to Juan Carlos Guajardo, head of mining consultancy Plusmining,

"We're in the worst moment of the health crisis with respect to the mining industry. (Chile) bet that the sanitary crisis would be manageable, but that's not what's happened."

According to Reuters, Chile's mining unions are calling for slowing production to sanitize the mines.

Analysts at Refinitiv cut copper mine production forecast by 2.4% for 2020. It came down to 19.6 million metric tons from 20.4 million metric tons in 2019. That may not seem like much, but in this market, it's enough to send metal prices soaring.

According to the Copper Development Association, 65% of copper demand comes from electrical manufacturing. That means the red metal is in everything—computers, televisions, mobile phones…not to mention the burgeoning electric vehicle (EV) market.

An electric vehicle requires 183 pounds of copper and a hybrid vehicle requires 88 pounds. A gas-powered car only uses 48 pounds. And all those EV charging station requires between 2 and 17 pounds of copper.

And while the pandemic put a damper on sales (down 25% in the first quarter of 2020), they still sold 59,100 cars in the U.S. And another 133,100 in China, 52,800 in Germany and 40,000 in France.

That adds up to about 37,700 metric tons of copper in the first quarter of 2020 alone. At that rate, the full year of EV sales will eat up about 150,800 metric tons of copper.

Another huge source of copper demand comes from wind and solar power plants. One windmill can use up to 6.4 metric tons of copper per megawatt. In 2020, new wind power construction set a new record. There are 24,690 megawatts under construction. And there's another 19,751 megawatts in advanced development.

That adds up to as much as 284,000 metric tons of copper in U.S. wind farms alone.

The demand side adds up quickly. Add to that a lack of supply due to the pandemic and it's a recipe for much higher copper prices.

If you don't have a position in a copper miner yet, it's time to get one.

Best Regards,

Matt Badiali

Matt Badiali is a geologist and independent financial analyst. He spent fifteen years researching and writing about great investments inside the natural resources sectors. He can be reached at www.mattbadiali.net.

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