Copper and aluminum miners are arguably the biggest commodity-related beneficiaries of ongoing decarbonization efforts but Morgan Stanley sees the short-term prospects as mixed for both sectors. In the mid-term, however, large deficits and much higher commodity prices are likely as demand outpaces supply. This timing allows investors to slowly build positions at lower prices in the coming quarters, and then profiting in the middle of the decade as commodity prices climb.
Morgan Stanley commodity strategist Amy Sergeant recently published her fundamental outlook in Copper, Aluminum and the Energy Transition. The focus was on increased demand for these metals resulting from projected electric vehicle proliferation, renewable power generation, and expansion of the electrical power grid.
Ms. Sergeant estimates that by 2030, energy transition markets will account for 29 per cent of copper demand, up from 20 per cent, and 22 per cent of aluminum demand, up from 15 per cent. The strategist is confident in her demand growth projections at 2.1 per cent annually for copper and 2.2 per cent for aluminum.
Morgan Stanley estimates that copper prices will hover consistently near US$4 per pound from 2025 to 2030, roughly 15 per cent higher than current levels. The US$1.34 per pound forecast for aluminum is 28 per cent higher than current levels.
The projected demand growth for both metals is actually slower than what was seen over the past decade amid ravenous demand from the Chinese.
But importantly, it will send consumption above available supply levels. Major miners are currently choosing to hoard cash flow or return funds to shareholders instead of investing in new supply. Ms. Sergeant projects copper deficits at 2.5 million tonnes per annum by 2030 and aluminum deficits of 4.9 million tonnes.
Supply deficits will, of course, support commodity prices and allow many miners to generate outsized profit growth, particularly those few able to significantly increase production. The strategist warns, however, that the deficits will only become apparent in the middle of the decade and the short-term outlook is less constructive.
“Commodity prices are set at the margin, meaning prices can fall on short-term fundamentals, no matter how good the medium-term story is,” Ms. Sergeant notes. Copper and aluminum demand is extremely economically sensitive, and a European-led global slowdown may lead to price weakness in late 2022 and into 2023.
Nothing in markets is guaranteed, but Morgan Stanley’s projections of metals deficits within three years seems a well-founded bet. Investors that acquire copper miners and aluminum producers at weakened prices in the meantime are likely to benefit.
-- Scott Barlow, Globe and Mail market strategist
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