EVs and Renewable Energy Boost Copper Demand

David Fessler By David Fessler
Energy and Infrastructure Strategist

Metals

Copper investors haven’t been very happy campers for the last six months. That’s because the price of copper and shares of copper miners have been slowly dropping.

In January, copper hit a high of $3.33 per pound. It has since dropped down to $2.81 – though that’s higher than the $2.70 from this time last year.

Copper’s drop has sent the prices of major producers down too. Shares of Freeport-McMoRan (NYSE: FCX) are down about 10% from their 52-week high hit in January.

So where are the price of copper and shares of mining stocks going from here? Based on a perfect storm of a coming lack of supply and increased demand, I believe copper is going nowhere but up.

Supply Running Low

Let’s first look at the supply side. Here are the top 10 producers, ranked in order of copper production in 2016 (the most recent year for which data is available)…

Together the top 10 producers mined and refined more than 9 million metric tons of copper in 2016. The top four companies produced more than 62% of all copper in 2016.

The problem is not enough new mines are being opened.

The top mining operations are producing 10% to 15% less copper today than they were a decade ago. Existing mine reserves are dwindling.

And I expect that trend to continue.

More than 30 labor contracts will be renegotiated in 2018. They are with some of the biggest copper producers in Peru and Chile.

While some of these negotiations will happen smoothly, others won’t. As much as 20% of global supply is at risk of disruption due to labor disputes this year.

Longer term, copper production is expected to ramp up to offset the lack of supply. It’s expected to be 150,000 metric tons in 2019 and 350,000 metric tons in 2021.

Demand Preparing to Soar

Let’s look at the demand side. I’ve been writing about electric vehicles for a decade now.

EV sales were slow up until a few years ago. Now we are finally starting to see some big sales numbers.

And big EV sales translate into a big incremental demand for copper. For instance, an all-electric SUV like the Tesla Model X gobbles up more than 220 pounds of copper.

It’s not used in just batteries either. Motor windings and heavy wires needed between the battery pack and motors add plenty of copper to an EV.

In May, global EV sales were up 59% year over year. Total sales this year could hit 2 million.

By 2025, 1 in every 4 vehicles sold in China will be electric. And China recently increased subsidies for EVs with large battery packs.

By 2025, copper from EVs should add 3.32 million metric tons to overall copper demand. But that’s not even going to be the big demand driver that could cause a potential copper supply-demand gap…

That’s going to come from the buildout of renewable energy infrastructure. This is an event that is going to play out over the next one to two decades.

By 2025, solar alone is expected to add 2.5 million metric tons of copper demand. And wind energy installations are expected to tack on another 1.85 million metric tons.

The U.S. is planning numerous copper-hungry offshore wind farms in the Atlantic that use more than 9 metric tons of copper per megawatt.

All of which is extremely bullish for copper.

Listen up, investors: It’s time to take some of your funds and invest them in one or more of the miners listed above.

Good investing,

Dave