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With copper price tipped to rise, investors look to add exposure
Analysts are predicting significant gains in the price of copper price in the face of an emerging global shortage of the metal, which is essential for the creation of renewable energy. Meanwhile, lithium is expected to move into oversupply.
Copper prices jumped 10 per cent in January and were up around 5 per cent over the year to March 13. In contrast, demand for lithium has slumped due to stagnant demand and rising inventories of lithium carbonate in some Asian countries.
Copper is essential to the renewable energy transition. Demand is being driven by the rapid, large-scale deployment of technologies such as electric vehicles, charging infrastructure, solar photovoltaics, wind and batteries.
Renewable energy projects demand more copper than do conventional fossil fuel energy sources, according to S&P Global, which forecasts the world could face a shortfall of nearly 10 million tonnes of copper by 2035.
Huge copper deficit emerging
Of all commodities, copper is expected to see the highest ‘green’ demand from the decarbonisation trend, analysts at Goldman Sachs said. “Over the long-term, we see copper benefitting the most from these policy changes given its higher usage in all clean energy technologies,” they said in a recent research note.
Goldman has forecast the copper market faces a 178,000-tonne supply shortage this year, a deficit it expects to grow to more than 800,000 tonnes by 2025 (see chart). It estimates that in 2022, sanctioned copper projects amounted to only 263 kilotonnes, “essentially the lowest approval volume in the last 15 years”.
The International Energy Agency, too, has pointed to a significant shortage of copper emerging as demand outstrips supply.
As a result, some brokers and fund managers expect quality miners of high-grade copper to yield attractive returns for investors.
Investors back copper miners
Given the expectation of rising copper demand and prices, BHP recently said it is boosting its portfolio of copper and nickel projects but will not enter the lithium market, which it believes is well supplied.
BHP expects global copper and nickel supplies to be insufficient to meet demand as few new mines for either metal are coming online in the near future; that reasoning was behind its successful bid for OZ Minerals. Existing copper production is dominated by lower ore grades, while new production is challenged by a dearth of quality ore discoveries and long project lead times.
Investors are responding. The Ausbil Global Resources Fund, for example, has significant copper exposure, more than any other commodity (see chart).
“We see 2023 as being the year for copper. We expect demand to increase, in part driven by the China reopening, while supply is underperforming expectations, all in a very tight market,” James Stewart, co-portfolio manager of the fund, recently said.
“Physical copper inventories are low, geopolitics is negatively affecting supply, particularly in South America, but demand is set to increase. The market fundamentals support a rosy outlook for copper.”
Shaw and Partners has recommended investors get exposure to the rising prices through copper miner AIC Mines, with a buy recommendation and a $0.70 target share price compared with its $0.43 market price.
“AIC offers investors one of the few ways to invest in a simple leveraged exposure to the copper price on the ASX,” the wealth manager said a recent research note. “Catalysts for the stock to reach our price target include… strength in the copper price.”
Separately, Morgans has an add recommendation on copper miner Sandfire Resources with a $6.50 target price compared to its $5.80 market level, up 5.3 per cent over the year to March 9. “The re-cycling of copper-hungry funds out of [OZ Minerals] is a major source of price momentum in our view,” analyst Tom Sartor (pictured) said.
Morgans also recently added a speculative buy recommendation to copper and gold explorer Rex Minerals, which is developing a large high-grade copper project on the Yorke Peninsula in South Australia. With a projected capital cost of $854 million, the Hillside project has received all primary approvals for Stage 1 development for copper and gold mining.
“We initiate coverage with a speculative buy rating and $0.49 target price, a discount to our valuation of $0.70,” Morgans analyst Chris Brown said. Rex shares are up 30 per cent over the year to date.
“While commentary identifies copper (and tin) as beneficiaries [of the move to renewable energy], the market has not driven investor interest to the same degree,” Brown said, contrasting copper prices with those for lithium, which have jumped over the last two years.
