Jon Cartwright, Senior Director – Ameriprise Investment Research Group
It’s hard not to come across stories about government or company plans to transition away from crude oil, coal, or natural gas on their journey to net carbon zero emissions. But many of these stories fail to mention one simple long-term theme that could benefit investors for years. The shift to renewable energy means copper demand will likely outpace supply, which could create investment opportunities in the copper market.
Here are 6 things to understand about the evolving copper market:
1. Renewable power infrastructure is going to take a lot of copper
The world is accelerating the construction of utility-scale renewable power projects to hasten the transition to cheaper, cleaner electricity. Governments are accelerating clean energy initiatives. Wind farms and solar arrays are replacing coal-powered electric generation worldwide. As global natural gas prices rise and Europe reduces its dependence on Russian natural gas, the world may find it increasingly attractive to construct wind, solar, or wave energy projects rather than building new natural gas-fired turbine generators to satisfy increasing electricity demands.
This is where copper comes into play.
Renewable power can be copper-hungry. Conventional natural gas-fired power plants require about one ton of copper to produce one megawatt of electricity, according to the Northwest Mining Association. By comparison, wind and solar power projects use three to six tons of copper per megawatt.
Renewable power generators need more copper to produce a megawatt than electric turbines fueled by coal, natural gas, or nuclear power. And those estimates don’t include the copper power lines needed to transport electricity from new renewable energy farms to population centers or modify the electric grid to deliver power to millions of urban and suburban charging stations.
2. Demand for electric vehicles is rising
Gasoline car engines use around 50 lbs. of copper, according to the Copper Alliance. Compare that to more than 180 lbs. of copper needed to generate the same horsepower from a battery-powered motor.
The larger the electric engine, the more copper it takes. For example, battery-powered electric buses and tractor motors can use between 490 and 820 lbs. of copper. Don’t forget that electric vehicle (EV) charging stations need at least 1 ½ pounds of copper or 18 lbs. if you want to charge up fast.
The Copper Alliance forecasts that by 2027, there could be 27 million domestic electric vehicles, up from 3 million in 2017, increasing the amount of copper demanded by EVs nearly ten-fold from 408 million pounds in 2017 to 4 billion by 2027. After gasoline prices rose above $5.00 per gallon earlier this summer, several polls suggested that U.S. consumers are now considering electric cars for their next automotive purchase.
3. Demand for alternative fuels will likely slow
Cleaner alternative fuels may seem like a better investment because we need them during the energy transition to EV. But which alternative fuel – natural gas, propane, ethanol, methanol, butanol or biofuel? All good near-term ideas, but even though they’re cleaner than motor fuels refined from crude oil, they’re still hydrocarbons. Green hydrogen, on the other hand, could be challenging to produce on a scale large enough to replace hydrocarbon fuels.
Twenty-five years from now, conventional and alternate fuels could face shrinking demand as more EVs hit the road. It’s not unreasonable to imagine a future where technological advancement brings us to a point where neither conventional nor alternate fuels can generate high enough returns to remain viable investments on an ecological or economic basis if EVs take over the roads faster than expected.
If you’re looking for transitional fuels while on the road to net zero, consider the international oils that produce gasoline, diesel, and alternative fuels. Alternatively, we see copper as a complementary pathway on the trek to net carbon zero.
4. Rechargeable lithium-ion batteries require copper
Cell phones, electric vehicles, and utility-sized battery arrays all use copper. Ninety-five percent of lithium-ion battery anodes use electrolytic copper foil. (Anodes (positive charge) and cathodes (negative) are the electrodes that carry electricity in and out of chemical batteries.)
So, if you’ve invested in lithium, cobalt, graphite, or other rare earth mineral producers or lithium battery manufacturers, you may want to talk with your advisor about adding a copper producer to your portfolio.
5. There’s no quick way to increase supply
If copper demand soars over the coming years, as forecasted, there’s no quick way to increase production. It could take up to three years to increase output at an existing copper mine. And opening a new mine can take around 16 years from permit to production, presuming it doesn’t face additional regulatory delays or social protest.
We expect shortfalls in copper supplies beginning in 2025. These shortfalls could easily last through the 2030s, as demand from energy transition construction projects and net carbon zero efforts accelerate before peaking in the mid-2030s. The added market from energy transition and net carbon zero directives could challenge copper’s ability to supply basic industrial needs for building, construction, and traditional electronic products. From our perspective, it doesn’t appear that visible private and public plans are sufficient to keep up with the expected rise in copper demand.
6. There aren’t any practical substitutes
When it comes to thermal or electrical conductivity, there are few viable substitutes for copper. Gold and silver are better electrical conductors but dramatically more expensive. Aluminum, copper-clad aluminum, and aluminum alloys are cheaper, softer, brittle alternatives that shrink or expand with temperature making them prone to connection issues and less useful for high voltage applications. Brass wire is a copper-based alloy alternative to copper but less conductive. Steel is a cheaper iron-based alloy that’s inflexible and can rust when exposed to air. Even as copper prices rise, we expect it to remain the metal of choice for electrical applications.
The timing is still in flux, but the direction seems clear to us. Cars are going electric, and electric utilities are turning to renewable power. We’re forecasting a multi-year secular rise in demand for copper as the world travels down a path towards net carbon zero and transitions away from hydrocarbons. From our perspective, this secular shift should cause copper prices to rise along with demand culminating in shortages in the mid-2030s, increasing cash flows and earnings for the large copper producers. Near term, we expect commodity copper prices to rise cyclically, boosting cash flows and profits for large copper producers if we avoid recession before the multi-year secular shift takes over.
Reach out to your Ameriprise financial advisor to discuss if investing in copper or other commodities are a good fit for your investment portfolio and financial goals.