🎓 Your Guide To Investing In Copper, The Metal With A PhD In Economics
Similar to aluminium, copper is also one of the most used metals on earth. In fact, the bronze age was named after the discovery and use of bronze, a copper alloy. Since its properties (malleable, antimicrobial, soft, great conductor of heat & electricity) are similar to precious metals such as silver & gold, and at a fraction of the cost, it makes it the ideal metal of choice for all kinds of industrial applications. Because of all this demand from virtually all aspects of the global economy, the strength of said economy is reflected on the price of copper. That’s why some would say copper has a PhD in economics, because it can be a reliable indicator/barometer of the economy.
What Can It Do For You
🧺 Portfolio Diversification. As always, adding commodities to your portfolio can help diversify and lower risk. Copper tends to be linked with the global economy (GDP — Gross Domestic Product, an economic indicator) since stronger economic growth tends to involve more construction, hence higher demand for copper. So, having copper means owning an asset that tends to act differently to other asset classes.
💰 Profit. Similar to aluminium, it’s possible to gain decent speculative returns from copper. The difference between aluminium & copper is that copper is arguably more tied to industries that’s directly linked to economic activity, such as manufacturing & construction. One could argue that speculating on copper can be much easier than other metals since the factors affecting its price are much more straightforward.
What Affects Copper Prices
The price of copper can fluctuate wildly as shown above & tends to be cyclical. There are several key factors that are involved in moving the price of copper:
- 🇨🇱 Chilean Supply. South America (Peru & especially Chile) produces around 30–40% of the world’s supply. Any disruptions here (i.e. labour strikes, natural disasters, etc.) can affect copper production, decreasing supply, and can potentially lead to higher prices.
- 🇨🇳 Emerging Market Demand (Especially China). As emerging economies such as China & India flourish, so to do their need to expand infrastructure, housing, & construction. Asia (especially China) represents most of global demand for the metal.
- ⚡ Production Expenses. Refining the copper ore to become the finished product is an energy intensive process. If electricity prices go up, copper prices may also go up to reflect this.
- 🏭 Industrial Demand (Economic Activity). Since copper is used in many manufacturing & infrastructure industries, indicators of economic well-being, copper is believed to be strongly linked to the global economy. So, trends in GDP (especially Chinese, US & EU) can certainly offer insight to future movements of copper.
- 🔄 Substitution. Even though copper is used by many industries, if prices were to rise, substitution can still happen. Aluminium can replace copper in transport equipment and refrigeration parts. Optical fibers can replace copper in telecomms equipment. Plastic can replace copper in pipes and plumbing.
- ♻️ Recycling Scrap. According to USGS, copper in all scrap contributes about 35% of the US copper supply. More scrap means more copper supply in circulation, which can then impact prices.
- 💵 US Dollar Strength. Like other commodities, the benchmark for the pricing of copper is in US dollars. A weak dollar compared to other currencies (i.e. need more USD to buy other currencies) may incentivise foreign buyers to buy (since their currencies are worth more in dollars & so can buy more copper) & drive up demand, increasing prices, and vice versa.
Where Is Demand Coming From?
As another popular industrial metal, it’s used in many different industries.
- 🚗 Transportation Industry. Copper is used in some parts of automotives, such as wiring, radiators, brakes, connectors & bearings. Electric vehicles will use about 4x more than normal ones.
- 🏗️ Construction Industry. New houses & buildings will require electrical wiring and plumbing. Copper & its alloys can also be used for decorative purposes in the architecture of buildings.
- 🔌 Electricals. Copper is arguably the best base metal electricity conductor. It’s used in power cables and wires. It’s also used in the infrastructure supporting renewable energy sources.
- 💻 Electronics & Appliances. The telecommunications industry need copper wires for phone & internet services. Copper is also used in circuit boards & electronic equipment.
- ⚙️ Industrial Machinery/Equipment. These include vats, vessels, tanks, piping, and other products involved in machinery such as gears and bearings.
- 🎺🍳 Consumer & General Products. These include musical instruments, kitchenware like pots and pans, brassware, & locks & keys.
- 🏙️ Emerging Technology. According to the International Copper Association, there are three main megatrends that are forecasted to increase copper demand:
-Electric Vehicles — copper will be required due to its excellent conductive properties, playing a role in energy storage, charging, & vehicle production.
-Energy — growing renewable energies sector will mean more infrastructure will need to be built.
-Construction — “smart cities & homes” equipped with electrical appliances & systems will require conductive metals like copper.
The Case Against Copper
Like aluminium, copper is a base metal that doesn’t act like precious metals. It’s not considered a safe haven asset since it doesn’t really protect you from inflation. Because it’s used in many manufacturing & infrastructure industries, its price can wildly fluctuate and is vulnerable to shocks in the market. So, when the global economy slows down or enters a recession, you can expect it to impact copper prices since demand will slow down. So, any unexpected changes in industrial demand or supply will definitely affect its price.
The Case For Copper
Copper demand is expected to keep growing, on top of an ever increasing supply & demand gap. Future developments in renewable energy, electric vehicles & smart home/city technologies will further fuel copper demand due to copper’s conductive properties. Furthermore, copper price volatility isn’t necessarily a bad thing. It offers an opportunity for you to gain speculative returns provided your timing is right. Because its price is so tied to industrial demand, any movements can arguably be easier to track than precious metals since you know what factors to monitor. Using this information will help you identify a good point in the market to enter a trade.
Popular Ways To Invest In Copper — Pros/Cons of Each
Unlike aluminium, you can invest in physical copper! If you’re still confused about how any of these work, refer back to our basics newsletter for a refresher.
- Physical Copper (Bullion Bars & Coins). You can buy and directly hold physical copper bullion bars and/or coins. There’s no doubt to the ownership of these assets, and is reliable. However, you may want to consider storing in a secure storage facility rather than at home. Further, you may be faced with several fees — the cost to convert raw copper ore into finished bars and coins tends to be passed on to you, as well as commission fees for the broker acting as the middleman. Selling it may also prove to be an issue as the broker may buy it back at below market prices.
- Copper ETFs. Copper-backed Exchange-Traded Funds are traded on stock exchanges, so they’re very easy to buy and sell. However, there are no assurances that you actually own the physical metal. You also probably won’t be able to take delivery of your copper. Depending on which broker you go with, you may be charged with trading commissions. ETFs also charge an expense ratio, or management fee that gets taken out of their total holdings and is then reflected on your account. Whichever ETF you choose, be aware of the fine print — the risks and costs.
- Copper Stocks. These are shares of copper-producing companies. Some of these companies don’t just produce copper, and are involved in a number of other operations. As such, they don’t necessarily follow the price of copper. Because of all this, you’re exposed to a greater number of risks involving company profitability, exposure to price movements of other metals, etc. You may want to consider looking at the company’s annual reports (especially operational costs), portfolio of what mines they have, the other metals they produce, and potential expansion plans.
- Copper Futures Contracts. A binding agreement traded on futures exchanges between two parties where they agree to buy/sell copper at a specified time in the future with an agreed-upon price. Because you are using a significant amount of borrowed money, even small price changes in copper can either lead to massive profit, or massive losses beyond what you paid for, potentially leaving you in massive debt. They are certainly high-risk and not recommended for beginners. Further, fees associated with futures trading include broker commissions, and exchange/clearing fees.
TL;DR — Is It The Right Investment For You?
As always, it depends on what your aims are. It’s a base metal that doesn’t act like precious metals and is tied to the global economy due to heavy industrial demand. So, when there’s a global economic slowdown, its price will be expected to fall. That being said, adding copper to an existing portfolio of commodities, or bundling it up with other commodities, can be a good way to achieve diversification, since copper is strongly correlated to the strength of the global economy. Furthermore, because it can be volatile, it presents an opportunity for you to gain decent speculative returns if your analysis and timing is right. By investing or trading in copper, you’re essentially hedging your bet on the growth & future outlook of economic activity.
🧺 If you are considering adding copper to your existing portfolio or bundling it with a number of others, you may want to consider doing dollar-cost averaging (regular investments over time) to build your copper position so you can take advantage of the volatility in the market.
💰 If you are considering adding copper for speculation and profit, you may want to monitor the factors that affect copper prices mentioned above, especially developments in the aforementioned trends. In addition to monitoring the factors mentioned above, you may also want to consider performing some technical analysis on copper’s price chart to help consolidate trends and patterns to help with your decision. That being said, its prices can swing unexpectedly due to speculators investing in the market, so be prepared and have an exit plan in place.
As always, if you are unsure, check in with a professional financial advisor before making any moves.