Copper surges on green energy and AI

Copper is back in the spotlight. Investors are focusing on the metal’s critical role in the global transition to clean energy and the rise of artificial intelligence (AI). While gold has been hogging the headlines with its stealthy ascent to record highs, copper has quietly been making moves of its own. It has gained 17.6 percent year-to-date, outperforming most other commodities including gold.

Chart points to all-time highs

Copper’s technical picture is bullish.  Last month, the metal broke out of a two-year trading range and surged to its highest levels since April 2022. The recent breakout above the 2023 highs of $4.35 per pound has paved the way for a potential run to the all-time high of $5 per pound.

Source: Tradingview.com, Wealth Securities Research

Secular drivers of copper demand

The long-term trends driving copper demand are expected to increase consumption in the coming years significantly.  Electric vehicles (EVs) are a major driver, using nearly four times more copper than conventional vehicles.  Renewable energy technologies such as wind turbines and solar panels rely heavily on copper for generators, transformers and cabling.

Expanding power grids to accommodate renewable energy sources is another critical factor, as copper is vital for energy transmission and distribution.  Furthermore, the widespread adoption of AI will increase demand for energy.  As energy demand increases and AI data centers are built up, the demand for copper used in power distribution, cooling systems, interconnects, cabling and networking equipment also rises.

Supply risks mount as mines face disruptions

While demand soars, the supply side of the equation remains challenging. Years of underinvestment in new mines and declining grades at existing operations have raised concerns about producers’ ability to keep pace with the anticipated demand boom. Recent supply disruptions and output cuts have further exacerbated these concerns.

Late last year, Panama ordered First Quantum Minerals to shut down its Cobre Panama operation, removing 300,000 tons from global supply. In Peru, strikes at the Las Bambas mine temporarily halted operations. Anglo American Plc, a major copper producer, announced plans to scale back output by 200,000 tons due to issues at its Los Bronces mine in Chile. Codelco, Chile’s state-owned mining giant, reported its lowest production in 25 years.

Investors pile into copper futures

Hedge funds and speculative investors are betting on copper, amassing record long positions in the futures market.  At the London Mercantile Exchange, long positions have reached a record high of 84,117 contracts, equivalent to more than two million tons.  This surpasses the previous peak set in August 2023 and signals bullish sentiment among investors. The Chicago Mercantile Exchange  has also seen a surge in long positions, with levels not seen since January 2018.

Safe-haven buying extends to industrial metals

Investors have been flocking to traditional safe-haven assets such as gold and the dollar to hedge against inflation and geopolitical risks. However, this trend may be extending to industrial metals like copper.  Some countries and investors are opting for hard assets like gold and copper instead of US Treasuries and other financial instruments that can be confiscated or frozen in the face of expanding wars worldwide.

$5 per pound within reach

As the green energy transition gains momentum and the transformation to AI accelerates, investors continue to bet on copper’s future. The path of least resistance for prices appears to be higher. While risks remain, particularly in the form of a potential global economic slowdown, the overall picture for copper remains bullish.  The all-time high of $5 per pound is now firmly in sight.

Philequity Management is the fund manager of the leading mutual funds in the Philippines. Visit www.philequity.net to learn more about Philequity’s managed funds or to view previous articles. For inquiries or to send feedback, please call (02) 8250-8700 or email [email protected].