Copper: Investing Essentials

Copper is one of the most-essential metals in modern society.

Aug 7, 2014 at 12:00AM

One of the very first metals ever taken out of the earth and used was copper. As early as 8000 B.C., it was used in coins and ornaments. By 5000 B.C., it was used to form tools that helped mankind emerge out of the Stone Age. Since that time, the metal has become ubiquitous, as copper is used now in building materials, power generation, plumbing, money, and even in electric vehicles.

What is the copper industry?

The mining industry extracts copper ore from the earth, and prepares it to be used as a feedstock to produce copper-based products. Copper is found in large deposits. In its most basic form, copper ore comes in two types: sulfide ores and oxide ores. Each type requires a different method of extraction and processing by the copper industry. Further, if the ore is near the surface of the Earth, it is mined in an open pit, which is the most common extraction technique. However, if the copper ore is too deep for an open pit, mining companies will use an underground mining technique to extract the metal, though this is a more-expensive method.

How big is the copper industry?

Chile leads the world in copper production. In 2013, the country produced 5.7 million tons of copper. That's a lot of copper, as it represents 20% of the country's GDP, and 60% of its exports. Next on the list is China, which produced 1.65 million tons of copper in 2013. Incidentally, China is also the world's largest consumer of copper, and it continues to import a considerable amount of the metal. Finishing off the top five copper producers are Peru (1.3 million tons), the U.S. (1.22 million tons), and Australia (990,000 tons).

How does the copper industry work? 

The Earth holds an incredible amount of copper. In just the top kilometer of the Earth's crust, there is estimated to be 5 million years' worth of copper at the current rate of extraction. That being said, most of that copper isn't economically viable to produce with present day prices and technology. It's the tiny sliver of economically viable copper that the copper industry is targeting. Estimates are that somewhere between 24 to 60 years' worth of these easy-to-mine copper reserves remain.

Coppet Mine Aerial

Open pit copper mine in Utah. Photo credit: Flickr user Mike Fischer.

World-class copper deposits are even more rare. However, once a large-scale copper resource is found, its owner can expand mining operations around the reserves, and grow copper production at a much cheaper cost than developing a new resource. That's despite the fact that these expansions can cost several billions of dollars.

Because copper is a commodity business, low-cost and expandable copper deposits are a big competitive advantage in the industry. One of the important factors that impacts the copper industry's cost structure is the fact that copper isn't usually the only commodity produced from a mine. Gold, silver, cobalt, and molybdenum are sometimes found along with copper and, in many mines, these are by-products of copper production. However, the costs associated with the production of these by-product commodities actually offset the cost of copper production through what are known as by-product credits. The larger the credit, the lower the cost for producing copper at a mine. 

In terms of production costs, copper mining requires a lot of energy. In fact, for Freeport-McMoRan, which is the world's second-largest copper producer, energy represents 20% of its costs. Because of this, access to inexpensive electricity, as well as energy-efficient operations, are both a big cost advantage to copper producers. In addition to that, mining is a labor-intensive industry, so labor is a big cost for the mining industry, in general. Further, work stoppages due to labor disputes can have a big impact on operations, and increase a miner's costs.

What drives the copper industry?

Copper is among the most versatile metals on the planet. But a bulk of it is used to make building materials like electrical wires, plumbing pipes, and even roofs. In the U.S., about half of copper used is in building materials. After that, about a quarter is used in electric and electronic products, one-tenth in transportation equipment, and about one-tenth for consumer and general products.


Copper fittings. Photo credit: Flickr user Tony Hisgett.

Copper is also used in more ways than ever before. For example, the U.S. military is looking to replace its lead bullets with copper bullets. The reason behind the shift is because a lead bullet, when spent, can have a negative impact on the water supply and food chain, while a copper bullet's environmental impact would be muted.

Another emerging use of copper is in hybrid vehicles. An average gas-powered car uses about 44 pounds of copper, as it is an essential component in the motors, wires, brakes, and bearings. But copper is even more important to hybrid vehicles, as these contain nearly 100 pounds of copper.

That being said, what's really driving the copper industry these days are emerging markets, like China. The country's copper-intensive construction industry alone accounts for 35%-40% of worldwide copper consumption. Because of that, its economic growth will really be a key driver for the copper industry going forward.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information