China and green energy push copper prices to record highs
TOKYO – Analysts predict ‘Dr. Copper’ to continue a strong rally as China-led global economy shows signs of emerging from coronavirus crisis, though some long-term investors are keen to steer clear .
The benchmark copper price on the London Metal Exchange in early May hit an all-time high at $ 10,460 per tonne and has since remained above $ 10,000. Its price had not been near this threshold for a decade; to reach it, it has almost doubled in a year.
Market analysts are not surprised.
The jump “was expected,” said Takayuki Honma, chief economist at Sumitomo Corporation Global Research. “Sooner or later the price would have passed $ 10,000.”
The impact of the pandemic has done little to soften demand, mainly due to China’s rapid recovery.
China is the world’s largest buyer of copper, consuming half of all global production. Imports of raw copper and domestic products increased 9.8% in the January-April period compared to a year earlier.
“There is virtually no reason for copper prices to drop,” said Tetsu Emori, CEO of Japanese investment advice Emori Fund Management. Emori noted that copper is emerging as an attractive commodity for investors, especially as major countries push for decarbonization, which is expected to boost demand for electric vehicles as well as wind and solar power plants.
Copper is mainly used to make electrical cables and is essential for infrastructure builders. He earned his “Dr.” honorific with its amazing ability to predict the health of the global economy.
China’s recovery has triggered a rise in the prices of many commodities despite the pandemic. In just one year, iron ore prices have jumped 78% and the benchmark lumber price has tripled. The prices of other metals like nickel and aluminum have also increased.
Many analysts believe copper should not drop much below $ 8,000 a tonne.
“Copper is now exploring a new point of price equilibrium,” Honma said. The chief economist of Sumitomo Corporation Global Research predicts that “the new price level of copper will go up a notch.”
His bullish outlook is not unfounded.
Goldman Sachs estimates that the demand for copper will increase by almost 600%, to 5.4 million tonnes, by 2030 due to the green transition. However, the market could face a supply shortfall of 8.2 million tonnes by 2030.
Development of new mines has been limited over the past decade, and mining companies remain cautious about doubling down on new developments in the face of rising costs.
Promising mines are located in places where it is difficult to deliver large equipment. Increased environmental awareness also leads to increased environmental mitigation costs. Even if companies started exploring mines now, it would take at least five years for a company to make anything.
Across Asia, meanwhile, shares of mining and trading companies have skyrocketed due to growing demand for copper.
The shares of the Japanese trading house Marubeni Corp. has jumped more than 34% year-to-date, while non-ferrous metal producers like Dowa Holdings and Eneos Holdings have posted strong gains since the start of the year.
Similar trends can be seen in other parts of the region. In South Korea, shares of copper maker Poongsan Corp. have jumped more than 46% this year, while Korea Zinc’s are up 16%. Chinese copper miner Jiangxi Copper’s share price rose 47% in Hong Kong, while Zijin Mining Group’s price climbed 31%.
Silver has poured into shares of related companies as hopes of a prolonged copper rally give investors an appetite for risk. It’s also part of a trend in which investors are switching from high-growth growth stocks to cyclical stocks in anticipation of economies recovering from their COVID fades.
As a result, the mining sector has overtaken tech stocks in recent months.
Shares of big tech names like Apple and Alibaba Group Holding remain in negative territory from the start of the year, and those of Japan’s SoftBank Group and Taiwan Semiconductor Manufacturing Company are showing only modest gains.
The MSCI ACWI Metals and Mining Index, comprised of large and mid-cap stocks in 23 developed and 27 emerging markets, rose 20% this year, well above the 4% gain recorded by the MSCI ACWI Information Technology Index.
Ravaged by capital inflows, copper exchange-traded commodities funds also posted significant increases in their returns.
WisdomTree Copper ETC has returned around 80% over the past year, with assets under management at one point reaching a record over $ 900 million. The United States Copper index fund, with more than $ 300 million in assets under management, also posted a year-over-year return of over 80%.
Last year, Japanese trading houses gained worldwide attention when it was revealed that Warren Buffett’s Berkshire Hathaway had bought just over 5% of Marubeni’s stock, Sumitomo Corp. and three other major traders.
Buffett, known as a value investor who holds stocks for long periods of time, said in a statement that trading companies “have many joint ventures around the world and are likely to have more. … I” hope that in the future there may be opportunities. of mutual benefit. “
Trading houses are deeply involved in the real economy. They provide energy, metals, raw materials and a range of other products to resource-poor Japan.
Meanwhile, some long-term investors are reluctant to put their money in an industry that is heavily dependent on economic conditions and market cycles.
Masafumi Oshiden, Head of Japanese Equities at BNY Mellon Investment Management in Tokyo, said: “It is still difficult to make a positive assessment based on ESG [environmental, social and governance] Criteria. “
Businesses are under increasing pressure from activists and investors to take action on climate change, as governments around the world have started to announce their commitments to decarbonization. Mining companies were called on to move towards cleaner production processes and commit to greater transparency in order to align with ESG values.
Oshiden, whose investments focus on the prospects for improving long-term enterprise value, points out that mining companies are not yet aligned with this strategy. “Profits are also hard to predict for trading houses,” he said, “which operate in multiple lines of business.”