Copper Demand Could Grow by 50% Due to Green Energy Demand
The growth will come as the green energy sector absorbs an increased percentage of the world’s annual copper production
Copper may seem like an old world commodity, but its role in the world economy is expected to grow significantly in the coming years.
That’s because when it comes to electrification, copper is king. Copper is a key conduit of electricity, which means things like solar farms, wind farms and electric vehicle (EV) batteries can’t operate without it.
The increased proliferation of EVs will require boatloads of copper. The average EV requires nearly 150 pounds of copper, as illustrated below.
Copper’s future is so bright that some experts consider it the fuel of the green energy revolution, much like oil during the industrial revolution. As a result, some estimates suggest that the demand for copper could grow by as much as 50% in the next 20 years.
One of the most interesting things about copper is that it fits right in with most people’s idealized vision of a cleaner and greener future. That’s because similar to aluminum, copper is 100% recyclable and experiences almost no degradation during the recycling process. There’s no limit to the number of times copper can be reused. Today, it’s estimated that roughly 80% of the copper ever mined from the earth is still in use.
But copper is also important to the markets because it has traditionally served as a key indicator of strength or weakness in the underlying economy.
Copper’s role as an economic indicator
Copper prices have long been tied to strength or weakness in the underlying economy because copper demand is strongly correlated with building activity.
Prior to the green energy revolution, copper’s primary uses included electrical wiring (60%), roofing/plumbing (20%) and industrial machinery (15%). So when global economic activity is rising, and builders/contractors are in high demand, the economy’s thirst for copper tends to grow.
Performance in copper prices over the last several years helps illustrate the metal’s strong correlation with the underlying economy. For example, at the outset of the COVID-19 pandemic, when economic activity ground to a halt, copper prices crashed by roughly 25%.
Then, as the global economy rebounded from the COVID-19 crisis, so too did copper prices.
Amid the stock market surge in 2020 and 2021, copper prices rallied from roughly $2.17/pound to just under $5/pound—an increase of 130% over the course of about two years.
However, copper prices experienced a significant decline in 2022, as expectations for global economic growth weakened. Last year, copper futures dropped as low as $3.22/pound.
This year, the global economy has been surprisingly resilient in the face of rising interest rates. A reality that’s been reinforced by the recent rebound in copper prices. Today, copper trades for about $4.12/pound.
Going forward, copper prices will continue to fluctuate based on expectations for global economic growth. With copper poised to play an even bigger role in the global economy—due to increased demand from the electric vehicle sector (illustrated below)—its value as an economic indicator should likewise strengthen.
Investors and traders may want to keep a close eye on copper markets in the coming months and years. A simple exercise that should provide investors and traders with additional insight into the relative strength or weakness in the underlying economy.
However, when doing so, market participants should also monitor the supply-side of the copper equation. In commodities markets, supply shocks—whether due to an underabundance or an overabundance—can also have a big impact on the market.
Last year, the world consumed roughly 25 million metric tons of copper. According to experts, the copper market is currently suffering from a supply deficit—one that could persist for the foreseeable future.
That sentiment was driven home recently by Robin Griffin, vice president of metal and mining at Wood MacKenzie, which focuses on commodities research and consulting. Griffin recently told CNBC, “We’re already forecasting major deficits in [the] copper [market] through 2030.”
Considering those market dynamics, any upside revision to the outlook for global growth in 2023 could have a positive impact on the copper market. On the other hand, if the copper market starts tanking in H1 2023, that could be an indication that the global economy is in for a hard landing.
In either case, the copper market will undoubtedly continue to reflect ongoing expectations for the economy.
For daily updates on everything moving the markets—including key developments in the commodities markets—monitor tastylive, weekdays from 7 a.m. to 4 p.m. CDT.
Sage Anderson is a pseudonym. He’s an experienced trader of equity derivatives and has managed volatility-based portfolios as a former prop trading firm employee. He’s not an employee of Luckbox, tastylive or any affiliated companies. Readers can direct questions about this blog or other trading-related subjects, to support@luckboxmagazine.com.
