Copper bobbins.SimoneN/iStockPhoto / Getty Images
The argument in favour of copper was straightforward when the commodity was in the doldrums last year: Copper is integral to a lot of modern pursuits, from AI to electrification to green energy, so it was just a matter of time before an investment would pay off.
But with copper prices soaring this year, can investors hope to squeeze more out of the now-hot sector?
Copper futures trading on the New York Mercantile Exchange rose to a record high, above US$5 a pound in mid-May, for a gain of 34 per cent this year.
Even though the price has since backed off, to US$4.77 a pound Thursday, copper has easily outperformed gold, crude oil and even the S&P 500 so far in 2024.
Naturally, the shares of copper producers are tagging along, given the prospect of soaring cash flows in the quarters ahead.
Freeport-McMoRan Inc. FCX-N, a popular go-to name because of its relatively low-cost production and its gargantuan size, is up 20 per cent this year.
No wonder. The miner estimates that for every 10-cent increase in the price of copper, its EBITDA – or earnings before interest, taxes, depreciation and amortization – will climb by US$430-million by 2025 and 2026.
The difference between copper priced at US$4 a pound and US$5 a pound, then, implies that this measure of cash flow will rise US$4.3-billion by next year. Given that Freeport-McMoRan’s reported EBITDA was US$9.5-billion in 2023, that’s a 45-per-cent increase.
Smaller producers, which can be more sensitive to shifting commodity prices, have embarked on even larger rallies. The share prices of Ivanhoe Mines Ltd. IVN-T and Lundin Mining Corp. LUN-T, for example, have risen 47 per cent this year.
“The year-to-date rally marks the beginning of copper’s second secular bull market this century, with copper miners set to print massive margins for the next 2-3 years at least,” Maximilian Layton, an analyst at Citigroup, said in a note this week.
Copper’s new glow follows better-than-expected global economic activity, as fears of recession fade and China supports its own growth with fiscal stimulus measures.
But there’s more going on here. Copper supply is notoriously slow to respond to rising demand, given the enormous regulatory hurdles and high costs associated with developing new mines.
That means copper producers could struggle to feed an increasingly copper-hungry economy as countries modernize their electricity grids, expand their fleets of electric vehicles and build the data centres that tap into artificial intelligence.
“I think the long-term picture is well-understood to be fairly constructive, so I don’t think that we’ve necessarily seen the highs” for copper, said Shane Nagle, an analyst at National Bank of Canada, in an interview.
Full disclosure: I sold my Lundin Mining shares in mid-March, booking a gain on my original investment years ago but missing out on … oh dear, another 20 per cent since I sold.
Nonetheless, I’m not alone in expecting a few bumps now that the price of copper is reflecting an increasingly optimistic outlook that might be ignoring several headwinds.
As Mr. Nagle pointed out, political views may be shifting away from green energy expansion at a time when new copper projects are coming online.
High mortgage rates are hampering the U.S. housing market, another big consumer of copper. China’s property market is imploding. EV demand, at least in North America, appears to be fizzling.
What’s more, some observers aren’t so sure that copper’s rise is signalling economic strength, which challenges some of the immediate demand assumptions for the economically sensitive commodity.
“I’ve always found that there is a pretty good correlation between the price of copper and the price of oil. If they’re both going up, it’s telling me that the global economy is doing well,” said Ed Yardeni, president and chief investment strategist at Yardeni Research, in an interview.
Right now, though, the two commodities aren’t in sync: Crude oil has slumped 11 per cent since early April, and the price is up just 6 per cent over the past year, lagging copper by 26 percentage points.
Mr. Yardeni’s conclusion: “It looks to me as though copper is overextended relative to global economic activity.”
Already, we have seen signs of a potential shift in investor sentiment. Copper prices fell 6 per cent Wednesday, and Freeport-McMoRan’s share price sank almost as much, highlighting a risk in joining the copper rally at its current heights.
Copper has a lot going for it. But it’s a lot easier to get enthusiastic about the commodity when it is out of favour.