Copper Poised for Growth Amidst Green Transition

Citigroup analysts predict a surge in copper demand, driven by the rise in electric vehicles (EVs) and renewable energy usage, making copper the "go-to" commodity for investors seeking exposure to the energy transition. Unlike other analysts reporting on the widely anticipated trend, Citi has attached specific figures to back its research, offering a more comprehensive view of market dynamics.

The bank forecasts that net bullish positions could reach approximately 4 million tons by 2025, a fifth of global supply and twice the previous peak in 2021 and advises investors to consider purchasing copper while prices remain around $8,300 per ton, given the current weak macroeconomic backdrop.

The group said that although copper prices might experience short-term dips, they are expected to rally within six to twelve months, potentially peaking at around $15,000 in 2025 under the most bullish scenario. However, there may be a significant gap between demand and supply for up to 10 years.

Renewables Impact on Demand

The push for renewable energy has intensified following the implementation of the Inflation Reduction Act, specifically in terms of accelerating their deployment in the US and abroad. Additionally, the war in Ukraine has stirred some regions to shift towards renewable energy sources to reduce reliance on Russian fossil fuels.

Despite these factors, the price of copper has been declining since its peak in April of last year and has continued to trend lower throughout the current year.

Price-Demand Disconnect

Copper is widely regarded as an economic activity indicator due to its use in essential products and services and its role in infrastructure development. Its primary use is for manufacturing equipment, followed by construction and infrastructure, accounting for over 75% of global copper consumption. However, the perceived economic slowdown has slowed down near demand for copper.

Investors have been exiting copper investments, with global copper funds experiencing a net outflow of $150 million in April, following a net inflow of $1.3 billion during the first three months of 2023. Concerns over the outlook for manufacturing and construction in China, the world's largest consumer of copper, have contributed to this trend. China has grappled with a housing crisis for over a year, later exacerbated by covid restrictions. While lifting restrictions initially boosted optimism and copper imports, China has since returned to pre-pandemic levels of copper imports, causing prices to falter.

Citigroup's Confidence

Despite the current global slump, Citigroup analysts remain confident that demand for copper will continue to rise as more countries aim to reduce their carbon footprint and transition to cleaner energy sources. The bank believes that as global economies recover, investors seeking to capitalize on the energy transition better participate in the growing shift towards renewables sooner than later.

The energy transition requires substantial investment in upgrading and expanding the electric grid to achieve de-carbonization goals and meet climate targets. Consequently, spending in the energy sector is expected to quadruple by 2030, driving further demand for copper. While some of this investment will still be directed towards traditional energy assets, copper remains essential for electrical transmission. Renewables are projected to account for 50% of energy production by 2050.

Government initiatives and regulations are further fueling demand for copper. California, a trendsetter in emissions standards, and six states that link their rules to California have already announced plans to prohibit the sale of new gasoline-powered cars under the Advanced Clean Cars II rule, emphasizing the need for charging infrastructure.

In line with this, President Joe Biden has set a target that 50% of new vehicle sales in the United States should be electric by 2030 and has allocated $5 billion to construct a nationwide network of 500,000 charging stations on top of having altered the EV tax credit to encourage domestic production. Notably, EVs require over twice the amount of copper compared to internal combustion engine (ICE) cars.

With copper demand projected to double by 2035, reaching 50 million tons per year, and last year's production only amounting to 22 million tons, Citi analysts anticipate car manufacturers will secure long positions of up to 1 million tons to ensure supply, leading to a surge in demand coinciding with a supply deficit.

Green Energy Plays

Certain companies stand to benefit as the world is expected to witness a copper shortage.

Southern Copper, which possesses the world's largest reserves, could experience a boost. The company is well-positioned to meet the growing demand with operations in stable territories such as Peru and Chile. The company has multiple expansion projects in the pipeline, projected to increase copper production to 926,000 tons in 2023 alone.

On the other hand, ChargePoint, the second-largest charging company in the US after Tesla, could see higher costs for its components due to the overall expected increase in demand for charging solutions. ChargePoint's recent launch of its AC EV charging solution, CP6000, along with acquisitions of has·to·be and Viriciti, has strengthened its position in the EV charging ecosystem.