Since the COVID-19 crash in mid-March 2020, Copper has shone with an amazing performance. Since the low, the industrial metal has even doubled in price. Year to date, the performance is still remarkable at 27%. But the price increases are no coincidence and, in my opinion, are fundamentally justified.
Copper is currently in a correction phase, so it is time to check the investment case for a potential investment.
First of all, there are numerous fundamental drivers for a sustainably higher Copper price. On the one hand, we have the fact that massive infrastructure projects around the world were started in the wake of the COVID crisis in order to support the economy but also to simply renew the infrastructure.
The US alone will invest as much as two trillion dollars in Biden’s Infrastructure Bill.
These investments will not only be used for the construction of new bridges, roads, or railways, but also to invest in renewable energies as well as the expansion of a reliable power grid, which should help to make the climate goals achievable. In the construction and infrastructure industry, Copper is needed and the more that is built, the more demand will grow.
On the other hand, we see the transition from cars with conventional combustion engines to electric drives. This point forms the second fundamental driver for a sustained high copper price. Because in order to be able to guarantee high battery capacities, a lot of copper is needed again. All the major economic nations are also participating in this project. China, USA, Germany, the whole European union, all of them have ambitious goals to electrify the road transport.
Since we are only at the very beginning of this transition, the demand for copper will remain consistently high for the next years, if not decades. The major economies of this earth seem to be increasingly dependent on industrial metals, similar to oil.
As a commodities investor, however, I also like to look at the positioning of the big players in the respective commodity market. Here we can see that the commercials are still in a rather underbought zone. The net position of the commercials still has some room for improvement.
Last but not least, I would like to draw your attention to an exciting visual correlation between the Copper price and the iShares MSCI Emerging Index Fund. I would explain that occurrence with the fact that China and Asia have a weighting of about 74% in the index. More importantly this region consumes 70% of the worlds refined copper production each year (China 51% alone). Since this correlation is existing since more than 15 years you can use this information to compare the price action of both assets and use it as a leading indicator in the form of divergences.
After copper is now going through the correction phase and is no longer as overbought as it was two or three weeks ago, I see good opportunities here to further expand my copper position. For me, a weak copper price remains a long-term buying opportunity.