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Real Return: why copper is king

Copper is a hot commodity and it could become even more important over the next decade. With innovation more reliant on 5G technology and a shift towards environmentally conscious transport modes, copper will be necessary to facilitate global change, according to Suzanne Hutchins of the Newton-managed Real Return strategy.

The start of 2021 saw unusually low global inventories for copper because of reduced production as mines cut back on capital expenditure¹ due to COVID-19 and labor issues, according to Hutchins. But supply shortages and strong demand prospects could lead the red metal to become more valuable in the future, she says.

“A strengthening in copper markets fits our view of a robust cyclical recovery and the policy environment against a backdrop of low inventories and near-peak mining supply, as well as the falling US dollar,” Hutchins says. “On the demand side, the metal serves multiple purposes in the production of electric vehicles (EVs).”

While EVs have been around for quite some time, the space is expected to keep growing² and the commodity that may peripherally benefit is copper.

EV growth

Copper is an essential component of the composition of EVs and is used in everything from batteries, windings and rotors used in electric motors; to wiring, busbars and charging infrastructure. Its usage in windings and electric motors, which came in just shy of 100,000 tonnes per year in 2020, is expected to leap more than two-fold in 2030 to over 250,000 tonnes per year, according to the International Copper Alliance³. The anticipated surge is due to a future increased market share of battery electric and plug-in hybrid cars, which is projected to account for 19% of the total market by 2030 and 72% by 2040, according to IDTechEx⁴.

Demand for pure battery EVs is predominately being driven by global greenhouse gas emissions targets, according to Hutchins. While EV sales in Western Europe are set to outpace one million this year⁵, the market is expected to undergo another surge in 2025, with EVs forecast to reach a market share of 13%⁵, according to Schmidt Automotive Research. The projected increase in market share is due to the timing of the next EU carbon dioxide emission target, which is scheduled for 2025⁶.

California, the largest vehicle market in the US⁷, intends to ban the sale of new gasoline powered engines by 2035⁸. Likewise, President Joe Biden has promised to changeover the entire US government fleet of 645,000 vehicles to EVs⁹. This will also require greater use of copper.

[caption id="attachment_26916" align="aligncenter" width="872"]Graph displays the value of copper rising Line chart showing the ongoing rise in value of copper[/caption]

5G push

Another factor increasing demand pressure on copper is the proliferation of 5G. As data becomes increasingly complex and essential, new means of connectivity will be necessary to accommodate the changing the world, according to Hutchins. With some companies considering extended flexibility surrounding virtual work; as well as increased popularity of digital health monitoring and the growing penetration of mobile banking, 5G will be crucial to ease the transfer of important data, she says.

While 5G is wireless, its deployment depends on copper and fiber cable to connect equipment. Copper is also used to construct 5G base station and data centers.

According to Caixin Global, China now has over 718,000 5G base stations, making it home to 70% of all 5G infrastructure worldwide¹⁰. In 2021, the country plans to add more than 600,000 5G base stations, which is partially why its new infrastructure projects (also including Artificial Intelligence and Internet of Things) will require 150 kilo-tonnes of copper in aggregate¹¹.

In market terms...

The strengthening demand means heavier pressure on supply for the metal. Put that together with its historic correlation to inflation¹², while considering how inflation expectations have risen, and its performance is up 13% YTD in US dollar terms and 78% over a one-year period ending 1 April, according to the S&P Global: Commodity Index Copper.

“We could potentially be in the first leg of a structural bull market for copper, although the ride may be bumpy,” Hutchins says. “However, we believe its demand will be bolstered by the global rollout of 5G, EVs and net-zero policies, as well as China’s 14th 5-year plan, which in itself raises demand for copper consumption sectors such as urbanization, transport and infrastructure, and green electrification to achieve emission reduction goals,” she concludes.


Suzanne Hutchins, Investment leader, Real Return team, BNY Mellon

Suzanne is a portfolio manager on the Real Return strategy and leader of the Real Return team. She chairs the formal weekly team meeting and, together with Aron Pataki and Andy Warwick, Suzanne is responsible for the final capital allocation decisions on the strategy. Suzanne started her career at Newton in 1991 as a global research analyst before working directly with Stewart Newton on multi-asset and RPI-based strategies and leading on Newton’s UK and Intrepid teams. In 2005, Suzanne joined Capital International, before returning to Newton to focus on the Real Return strategy. She is an associate member of the CFA* and UK Society of Investment Professionals (UKSIP) and graduated from University College London with a First Class BA (Hons) degree.

*CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.


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Notes

¹ Capital Expenditure (CapEx) are funds used by a company to acquire, upgrade or maintain physical assets.
² IHS Markit: IHS Markit forecasts global EV sales to rise by 70% in 2021. January 19, 2021.
³ International Copper Association: EV motors boost copper demand. Accessed March 2021.
⁴ IDTechEx: Research commissioned by the International Copper Association. March 2020.
⁵ Forbes: Europe’s Electric Car Sales Will Beat 1 Million in 2021… March 4, 2021.
⁶ The International Council on Clean Transportation: CO2 emission standards for passenger cars and light-commercial vehicles in the European Union. January 2019.
⁷ Policy Advice: 20 In-Depth Global and US Auto Sales Statistics for 2021. February 27, 2021.
⁸ Reuters: California sets goal to ban sale of new gasoline powered vehicles starting in 2035. September 23, 2020.
⁹ CNBC: Biden plans to replace government fleet with electric vehicles. January 25, 2021.
¹⁰ Caixin Global: China outspends Rest of the world on 5G Infrastructure by 2-1. February 25, 2021.
¹¹ Seeking Alpha: What’s Driving Coppers Rally. March 7, 2021.
¹² Seeking Alpha: What’s Driving Coppers Rally. March 7, 2021.

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