If you believe in the so-called "clean energy transition," then you almost certainly believe that demand for copper is going to rise significantly in the decades to come. That's what major copper miners Freeport-McMoRan (FCX 3.79%), Southern Copper (SCCO 5.97%), and the U.K.'s Antofagasta (ANFGF 2.30%) are all hoping to see. The three stocks represent an oft-underappreciated way to invest in the transition. Here's why.
The case for copper
The long-term demand case for copper is quite simple and was highlighted by Freeport-McMoRan on its recent third-quarter earnings call presentation. Management cited figures from the International Copper Association (ICA) outlining that electric vehicles (EV) used up to four times the amount of copper as internal combustion engines. In addition, using renewable energy to fuel power generation requires four to five times the amount of copper as using traditional fossil fuels.
Image source: Getty Images.
Antofagasta's management agrees with the argument that copper has a key role to play in creating a greener world. It sees demand coming from:
- Urbanization, which is expected to lead to increased demand for more energy efficient buildings. Copper's role as a superior conductor of electricity means it will be used more in buildings.
- Growing electrification, especially new solar and wind projects.
- EVs and charging stations.
Antofagasta's breakout of current consumption by industry (23.5 million tonnes in 2018) is shown below.
Data source: Antofagasta presentations.
Renewable energy demand
Now let's take a look at how EV and renewable energy will boost demand growth. In the near term, renewable energy is likely to be a bigger factor. For example, BMO Capital Markets research forecast that solar would add 2.5 million tonnes per annum (mtpa) to global demand from 2017 to 2025, while wind would add 1.85 mtpa to copper demand.
The assumptions are made based on the projection of solar and wind demand, and are obviously subject to how demand plays out. For example, according to the Copper Development Association, offshore wind installations require 2.7 times the amount of copper that onshore installations do to produce the same energy. Solar takes even more copper.
Electric vehicle demand
The ICA outlines that the average internal combustion engine uses 23 kg of copper, compared to 40 kg for a hybrid EV and 83 kg for a battery EV. Obviously, the significant difference between the copper content of a hybrid EV and a battery EV means that when you pencil in estimates for an increase in copper demand from EVs, the figures will depend on your assumptions on the share of the market across internal combustion, hybrid EV, and battery EV vehicles. Nevertheless, it's safe to say the growth of EVs in general will significantly boost demand in the coming decades.
Image source: Getty Images.
The same BMO Capital Markets research noted above argues that EVs will add 1.5 mtpa to copper demand from 2017 to 2025. The likelihood is that as EV demand takes off in the coming decade it will significantly add to copper demand.
What about supply?
According to the ICA, since 1950, the copper mining industry has had on average roughly 40 years of copper reserves and over 200 years of resources left. For reference, reserves means deposits that are discovered and assessed to be economically viable, and resources are "potentially profitable and undiscovered deposits" based on surveys.
As such, it's highly likely that more copper supply will keep coming down the pipeline, keeping prices in check despite higher demand. In addition, history suggests that there will be developments in recycling and mining technology that will add to the potential supply of copper.
In this context, investors shouldn't get over exuberant regarding the recent surge in prices. The reality is that a resurgence in demand from China's economic recovery from COVID-19 has pushed up prices in the near term. It may well continue into 2021, but as ever, it's very hard to predict where copper prices will go from there.
Data by YCharts
Stocks to buy?
While the price of copper is inevitably going to fluctuate in response to supply and demand issues in the near term, it looks highly likely that overall demand will rise over the long term thanks to EVs and renewable energy. That's an underlying positive for investors in copper miners like Southern Copper, Antofagasta, and Freeport McMoRan, even if the current surge in copper prices starts to slow.
All told, if you are prepared to stomach some volatility, then initiating a long-term position in copper mining looks like a good decision on a risk/reward basis right now.
