Copper has gone down significantly from its peak. Is it worth buying some copper miners ETF (NYSEARCA:COPX) or copper ETF (JJC) now or is it likely to go down more? I think that it is worth buying some now because demand does not seem to be going down in the near future. The expected demand seems to be able to absorb the expected supply this year. To incentivize new capacity copper price needs to be higher. I have bought Copper Miners ETF (COPX) as a play on copper prices.
There are both bulls and bears on copper price among the analysts.
Analysts at Citi said that "demand specifically for copper will get important micro boosts from the power and construction sectors. The State Grid, a major component of China's copper usage, is forecast by the bank to increase spending by 5 percent this year after a flat 2018. A surge in housing starts last year should also translate into a pick-up in copper-intensive completions this year. But the larger impact on metals usage from the latest stimulus will come from the credit impulse that is now traveling down multiple pathways in the Chinese economy."
On the bear side, Barclays says that copper price will go down because of "sluggish Chinese activity ahead will test the market’s macro nerves. And while inventories are undoubtedly low, they contrast with weakening physical Chinese premiums and little sign of time-spread tightness on the London Metal Exchange".
This article tries to determine where the copper price is headed. This is done by coming up with a demand structure based on China which uses a disproportionately large amount of copper. Then some numbers are put on the demand and supply to make a guesstimate if there is enough demand for the expected supply.
The most significant user of copper by far is China. It used about 11.8 million metric tons of copper out of 23.7 million metric tons used worldwide in 2017. This about 50% of the total worldwide usage. It is likely that if demand in China goes down it would have a disproportionate impact on the copper market. The high percentage of copper used in China is unusual. China has 1.4B people out of a population of 7.5B people in the world. This is about 18% of the population. China's GDP was 12.24 Trillion USD in 2017 compared to a world GDP of 80.78 Trillion. This is about 15% of the world GDP. Most of the copper is used for electrical purposes. Either to create and transmit electricity like generators and transmission lines or to modify electricity to enable it to do work like motors and lights. China consumed about 6000TWh of electricity in 2016 out of a worldwide total of about 23000TWh. This is about 26% of the world total. The USA consumes about 4147 TWh but only uses about 1.8 million tons of copper per year. If just the amount of electricity used is a measure of how much copper is used by a country, then China which uses about half again as much electricity as the USA should only use 2.7 million tons of copper. However, China uses more than 4 times more than that. The disproportionately high usage of copper suggests that the future copper demand is being frontloaded.
Many articles say that the large copper demand could be due to electric cars, wind power, and solar power. Battery electric vehicles contain about 183pounds or 83kg of copper. A battery electric bus contains 814 lb or 369kg of copper. About 500000 electric vehicles were produced in China in 2018. If all of this were electric cars then they would use about 41,500 tons of copper. if a further 105000 electric buses were produced than that would use another 38,745 tons of copper. This amount is too low to account for excessive copper used in China. A well-designed solar PV plant might use approximately 9,000 pounds or 4 tons of copper per MW of solar. China installed 52830 MW of solar in 2017. This would require about 211,320 tons of copper. A wind farm uses about 6.4 tons of copper per MW. China installed 19.7GW of wind power in 2017. This would require about 126,080 tons of copper. Electric vehicles, solar and wind account for less than half a million tons of copper use in China in 2017. The calculations for renewable energy is borne out by this report. Electric vehicles, solar and wind can't account for the vast difference in copper use between USA and China. High-speed trains also require a lot of copper. Each high-speed train requires 10 tonnes of copper components, plus 10 tonnes in the power and communication cables per kilometer of track. China plans to put about 6800km of railway track into service in 2019 out of which 3200km are high-speed tracks. Erring the side of caution, the tracks might account for about 68000 tons of copper, with another 68000 tons accounted for by the trains. In total this will be about 136000 tons.
Another area that accounts for copper usage is housing, buildings, and infrastructure. An average single-family home uses about 439 pounds of copper or about 200kg of copper. there were 6.77 million apartments newly built in China. If we equate the copper used in a single family house to that of an apartment, the copper use would be about 1.35 million tons of copper. However, I am not including commercial buildings, factories etc there is not much information about the amount of copper used in commercial buildings to come up with a reasonable figure for them. However, this report shows that the total demand for building construction in China is about 2 million tonnes in 2014. We can make a guesstimate that copper used in buildings should be about 2.5 million tonnes in 2017. So far about 3 million tonnes out of 11.8 million tonnes of copper has been accounted for.
| Copper, tons | |
| Electric cars | 41,500 |
| Electric buses | 38,745 |
| Solar PV plant | 211,320 |
| Wind Power plant | 126,080 |
| High-speed trains | 136,000 |
| Buildings | 2,500,000 |
| Total | 3,053,645 |
Table 1: Estimated copper usage for a few industries in China in 2017
Another big use of copper is for grid expansion. About half the copper used in 2014 was for the power sector. If this holds true in 2017, this works out to be about 5.9 million tons of copper. This quantity is also borne out by this article which says that 72% of copper use is in power and utility sector and electrical products. Is this still applicable today? I found an article that says about 170 billion yuan of investment in 2014 in grid expansion used more than 1 million tons of copper. The price of copper in 2014 is similar to that today. In 2017 the State Grid of China one of the biggest electricity company invested about 485 billion yuan. This should theoretically translate to about 2.85 million tons of copper demand. It is unbelievable that a single state-owned company in China is using one and a half times as much copper as the whole of the USA but I have not been able to find any proof that this is wrong. Instead many other articles also say that the State Grid of China is one of the biggest uses of copper. 2 other points make me think that there is a good chance that this information is correct. One is that I came across this Chinese report which says that copper electric cables are more cost-effective than aluminum cables in the long run for a certain price of copper. The second is more speculative. Copper is considered a strategic material and China does not produce as much of it as it needs. If I ever wanted to stockpile vast quantities of copper, hiding it in plain sight in copper cables is an audacious and cheap way to do it. The copper cables can be replaced by aluminum cables as and when needed. Another article states that the State Grid of China company plans on investing about 2.3 trillion yuan between 2016 to 2020 to expand its power transmission network. This is part of China’s environmental push, moving away from coal power, shifting power generation inland away from the coast and towards renewables. This works out to be about 460 billion yuan a year which is about what it spent in 2017. So going forward the demand for copper from the expansion of the transmission network by this one company is likely to be about 2.85 million tons per year until 2020. There is another major grid company China Southern Power Grid that is one of the 2 established by the Chinese government to build the grid infrastructure. It spent about 81.7 billion yuan on grid infrastructure in 2017. This likely means it used a little less than half a million tons of copper. It is likely that these 2 Chinese companies alone accounted for at least 3.35 million tons of copper. It is likely that the power sector still accounts for half of the total usage of copper in China. Grid investment is planned in advance and the investment value is known in advance. Grid expansion is also likely to be frontloaded. Frontloading makes sense as infrastructure capacity like water pipes, telecommunications networks and electricity networks are built with future demand in mind. Once the electric grid is able to absorb a significant amount of renewables the investment will likely reduce. Thus grid investment likely gives a good indication of future copper use.
Global copper mine production is expected to rise 3.7 percent per year to 22.6 million metric tons in 2019. This is about 0.8 million tons. Can this supply growth be absorbed? In 2018 electric vehicle sales grew by 819 000 vehicles from 2017. It is likely to grow at least by as much in 2019. Therefore this will absorb about 68 000 tons of copper. For solar the increase in 2019 is forecast to be 123GW which is about 20GW more than in 2018. This will likely absorb about 80 000 tons. Wind power additional new installed capacity in 2019 is forecast to grow by about 4GW from 2018 so it should absorb an additional 25600 tons of copper in 2019. Conservatively I am also assuming that copper demand for housing and buildings worldwide remains the same. Therefore another 626,400 tons of additional copper supply needs to be absorbed. State Grid of China is forecast to be investing 5% more than the previous year on grid infrastructure and that would likely absorb another 150,000 tons of copper.
| Copper, tons | |
| Electric vehicles | 68,000 |
| Solar PV plants | 80,000 |
| Wind Power plants | 25,600 |
| Worldwide housing and buildings | 0 |
| State Grid of China | 150,000 |
| Total | 323,600 |
Table 2: Estimated increase in copper demand worldwide for selected industries in 2019
Looking at Chinese demand structure, grid expansion is the most likely place where the additional demand will be absorbed. USA utilities are likely to spend USD 1 billion more in 2019 in transmission infrastructure based on their past years. The Microgrid market is forecast to expand by USD 2 billion per year. Europe is expanding its grid infrastructure and has started spending more money on it. India is expanding its grid at a furious pace. Southeast Asia will spend USD 9.8 billion in grid infrastructure from 2018 to 2027. A lot of the grid upgrades are driven by the increasing mix of renewables in the electricity supply especially for countries with somewhat mature grids. For the year ahead renewable mix is likely to increase and thus put further pressure to improve the grid. Some countries with less mature grids, for example, Pakistan, are also expanding their grids because money is available to do so. there are also some other areas like India electrification of villages and India electrification of trains which will positively impact copper demand from 2019. Taking all of this known copper usage it is very likely that all the additional copper supply will be accounted for.
Conclusion
China seems to be the forerunner in copper demand. Looking at its demand structure, the demand in the next few years is first likely to be driven by grid expansion. However, it looks like grid expansion is being frontloaded and is addressing the present and future needs of the renewables and electric vehicles. Frontloading makes sense as infrastructure capacity like water pipes, telecommunications networks and electricity networks are built with future demand in mind. Once the electric grid is able to absorb a significant amount of renewables the investment will likely reduce. Grid investment is usually planned in advance and this is a good indicator of future demand. Thus investment in grid expansion, particularly in China is a key variable to follow. Changes in demand from housing and building and manufacturing will likely not make a difference as much of a difference in the near future on copper demand as grid expansion. However, a point is likely to come in the future when grid expansion runs ahead of future demand and there is a cutback. This happens over and over in history from optical fiber networks in the USA in the 2000s to the iron and steel industry in China. At that point, copper demand from electric cars and renewables may not be able to absorb the collapsing demand from grid expansion. Thus in between when grid expansion is finished and before car and solar can take up the slack there might be a dropoff in the demand growth for copper. Grid expansion should be a pretty stable demand for copper in 2019 as it requires long term planning. If grid investments start to go down or if aluminum wire starts being substituted for copper wire, it is a good indication the future demand for copper is likely to go down. I think copper is a buy on weakness for this year.
