A global selloff has recently hit the leading economic barometer in the resource sector—copper.
As a reminder, investors use copper as an indicator of business activity. When the economy is strong, almost every sector grows, providing strong demand for the metal. But copper demand follows the same path when growth expectations worsen.
The copper price has been in decline for at least a month; as of writing, it has reached a six-month low.
The reason for this is low growth expectations. Even the Federal Reserve’s economists admit it in one of their recent statements. And now, most investors are watching if the world’s most important central bank will keep raising rates or take a pause.
The next meeting will take place on June 13-14. For now, the uncertainty persists.
However, every crisis provides an opportunity, and we see one in copper.
Structural Changes
If you play it right, copper’s near-term price weakness can lead to long-term gains.
You see, even if the global economy slows down, eventually, it will recover. Timing the bottom is impossible, and since growth expectations are low already, little could change when global economic growth actually slows down.
This is why we keep our bullish outlooks for the green energy transition, infrastructure, and artificial intelligence.
As a main building block, copper is at the core of the first two megatrends we listed. The metal has no viable substitutes and will be in demand for decades.
However, investors are extra careful now and often overreact to the news.
We see this overreaction as another opportunity.
The other major factor supporting copper in the long term is limited supply.
Chile, the leading copper-producing nation, recently announced that it would raise taxes for the country’s mining industry. This is not supportive of copper miners, who may halt some of their mines and expansion projects due to worsened economics.
We’ll unlikely see an immediate effect on copper output, but the companies will adjust their long-term projections with a high chance of lowering targets.
Industry insiders have already noted the structural changes in the copper supply-demand balance. CRU Group, a research agency, is projecting a copper deficit starting as soon as 2025.
In just two years, it expects the supply of copper to fall behind its smelting demand. This is when smelters will begin chasing the metal and pay a premium to secure as much supply as they can.
It will be a pivot point for copper prices, and we would expect these to rebound.
For now, as the prices are heading down, it’s worth monitoring the space and keeping the most well-run copper companies on your watch list.
Once the metal begins to recover, copper mining companies could become one of the best investments of the next phase of the metal’s cycle.
Thank you for your loyal readership,
The Financial Star team
