As I write this column, it feels like the markets might be starting to temper their euphoria at the US election results; or at least it feels like there are the beginnings of thoughtful discrimination between those assets that are likely to prosper and those that will suffer under a Trump presidency. In the immediate aftermath of the results, there was an almost universal surge of green on the screens, with one notable exception. One asset that failed to catch any of the post-election wave was copper. This is unusual – market old-timers used to call it Dr Copper, because it was such a dependable way of judging the health of the wider economy. So why, with so much froth, has copper been left languishing?
As the chart below shows, the metal has fallen significantly in price over the past six months, notwithstanding all the talk about the vast grid upgrades required to drive us into the bright AI future, not to mention the investment in the transition to net-zero, which will see widespread electrification (and consequent demand for copper).
The answer to this apparent conundrum may be, as the chart below illustrates, that the demand for copper actually comes from a relatively diverse range of sectors and industries, with EVs and renewables only accounting for around 7% of total demand and even the electrical network accounting for less than a quarter.
As I always do when questions around commodities arise, I turned to Albert Chu, CFA, our hugely experienced PM specializing in natural resource strategies. The message seems to be that, somewhat uniquely, copper has drawn focus as a kind of reverse Trump trade, where a number of fairly basic heuristics are being applied that suggest that demand for the metal will be impacted both by a potential US/China trade war and by a retrenchment from climate commitments. This seems to me – and to Albert – to be a naïve reading of the situation, and worth some further investigation.
The first thing to say is that manufacturing PMI is still in a destocking phase globally. While we expect this trend to reverse in the near future, it has an inevitable impact on the demand dynamics for a metal that exhibits significant correlation to the capex cycle.
This, though, is not enough to explain such a palpable lack of enthusiasm for copper, even as investors push market after market to all-time highs.
Let’s think a little more deeply about how Trump’s presidency might play out when it comes to copper. A good place to start is the chart below, which shows the price of the metal for the duration of Trump’s first term in office. I’ve marked out four clear periods here: the first, a 32% rise, when Trump’s regime was all about tax cuts and economic stimulus; a second, around 2018, marked the beginning in earnest of Trump’s trade wars with China, and saw a 26% slump in price. There was then a period of treading ground, when it was clear that the trade wars would not be as dramatic or punitive for Chinese growth as expected. Finally, you got the significant appreciation in price as a result of Covid-related disruption and inflation.
Trump is a populist and was elected with the clearest of mandates: to improve the economic situation of US citizens and further tame inflation. It seems highly unlikely to me that an immediate trade war will achieve this. Far more likely, as per his first term, he sets about a program of significant stimulus first, a situation that would benefit copper pricing.
As part of this, we can expect the Fed to continue on its program of rate cutting, perhaps at a faster rate than is currently priced in (whatever the status of its independence). Historically, copper has performed extremely well during cutting cycles, delivering on average just under 50% returns in the 36 months following the first cut.
President-elect Trump has stated that he will bring the war in Ukraine to an immediate end. If this is the case, (and whatever our thoughts on the situation) there will be a vast and multinational effort to rebuild the country, with a consequent uptick in construction demand. Europe would also benefit from a significant increase in cheap LNG. Again, we’re not saying that this is an outcome to be desired, but when it comes to demand for copper, it is hard to construct a scenario in which the current price action is justified. Even should the status quo be maintained in Ukraine (and the Middle East), it should be noted that the defense sector is one of the top copper consuming industries.
Again, playing out a worst-case scenario, in which a Trump presidency implements immediate and swingeing tariffs on China, this does not necessarily signal gloom for copper demand. The more that external trade is penalized, the more China will look to internal demand levers to stimulate the economy. An internal stimulus program would see huge demand for white goods, cars, computers and electrical appliances – all of which require copper.
There is also the supply question to bring into focus. Substitution is neither easy nor cheap, with aluminum suitable in some cases, and only silver a genuine (but very costly) replacement. New supply, whether through technological innovation or new mining, is expensive and takes a long time to come online. Albert estimates that you need copper prices of over $6/lb. to incentivize new technologies and new greenfield development. The price is currently just above $4. The supply pipeline shows single-digit increases for the rest of the decade, before supply gets really tight and deficits kick in. In summary, the picture from the supply side looks supportive of higher prices.
So if we agree that the simple heuristic – Trump is bad for China, China drives copper demand, therefore Trump is bad for China – is questionable at the very least (and Chinese stocks, which are up since the election, would agree with you here) what about the energy transition?
Even if we put aside the fact that the man who appears to have been integral to the election victory is the owner of one of the world’s foremost EV brands, and that the new regime’s friendliness to both Bitcoin and AI is likely to require an even faster upgrade of the US electricity network, it still appears clear to us that, over the longer term, the transition to green fuels is both necessary and inevitable. Even should we see some backsliding in commitments and withdrawals from international treaties, the direction of travel is clear. Oil is running out and temperatures are rising. All the rhetoric in the world does not permit us to escape from the bluntness of these facts. And moving to a decarbonized future will require an awful lot of copper.
I have no particular copper axe to grind here (do you even get copper axes?), but rather it seems to me that the price action in copper is a reflection of the markets relying on an over-simplified interpretation of the political landscape, a reflection of heuristics that don’t sufficiently consider the complexity and multi-faceted nature of the drivers of copper demand.
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