GFC history suggests copper will go on a colossal bull run in 2021
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Copper prices are now at seven-year highs, driven by China’s post-pandemic infrastructure drive.
There are echoes here of the post Global Financial Crisis (GFC) period, circa 2010, when world #2 economy China began spending mountains of cash to keep its economy growing.
A huge chunk of this spend went into infrastructure construction, which had a direct impact on metals prices. Iron ore, nickel and copper are just a few that rebounded strongly in the ensuing period.
The same thing is happening right now.
According to Todd Warren, head of research at Tribeca Investment Partners, the outlook for copper is even more bullish this time around.
“Certainly, the anecdotal evidence that we have seen indicates China is pressing the pedal to the metal,” he told Stockhead.
“It’s as big, if not bigger, than it was post-GFC.
“But what is really exciting is that post-GFC they were still massively export driven as an economy. Today China is consuming all of it domestically.
Then there are copper’s well known supply issues.
On average, it takes seven years to get a new mine up and running, from first successful exploration hole to first tonne of dirt out of the ground.
But the resources sector’s long, drawn out downward trajectory –which bottomed around the end of 2015, early 2016 — meant there has been a lack of investment in new mines.
Sandfire Resources (ASX:SFR), one of a only a few copper-focused producers on the ASX, is building a new mine in Botswana.
Using strong cash-flow from its company-making DeGrussa mine in WA (the company had ~$304m in the bank at the end of September) Sandfire will spend ~$350m to build the T3 Motheo copper-silver project.
Rio’s world-class Winu discovery in WA is also ostensibly being fast-tracked to production.
But the reality is there is very little new supply coming through the pipeline, right when we need it the most.
We are now entering a structural bull market for a number of different commodities, especially copper, Warren says.
“We are really very excited about the prospect of 2021 for the resources sector. Copper is one of our preferred plays,” he says.
“Could it blow off and overrun on the topside? Absolutely. We’ve seen this before. Looking at post GFC period, copper ran to +$US4.50/lb.
“And China’s economy is that much bigger than it was eight, nine years ago.”
But copper won’t just be a 2021 story.
Looking forward, the rollout of electric vehicles is going to be a huge demand driver for copper.
“You need roughly 3.5 to 4 times as much copper in an EV than you do in a standard internal combustion engine,” Warren says.
“Copper is a roughly a 22 million tonne a year market today. Based on fairly conservative assumptions, copper in EVs will go from near zero to at least 2 to 3 million tonnes by 2030.
“10 years is not very far away. “
And it’s not just about electric vehicles. The broader decarbonisation thematic requires a complete re-tooling of our power grid.
That will also require a considerable amount of copper.
“The investment that is required in global power grids is really quite extraordinary. It’s difficult to wrap your head around,” Warren says.
“All of this is hugely supportive of copper from a demand perspective.”
ASX-listed explorers are benefiting from the improved sentiment.
Porphyry hunter Hot Chili (ASX:HCH) raised $25.6m to fund a 40,000m drilling blitz. Alicanto Minerals (ASX:AQI) and Cohiba Minerals (ASX:CHK) are also cashed up and ready to drill their respective projects.
Just to name a few.
“The higher copper price certainly spurs more money being allocated by people on our side of the fence to companies that may be exploring,” Warren says.
“Companies are able to raise money to go and drill, which brings with it a higher chance of copper discoveries being made.”
Explorers can give you “lots of turbo charge” if they find something, but miners are benefitting from this bull market right now, Warren says.
“In our portfolio we are primarily exposed to producers at the moment,” he says.
“We do invest in explorers but our biggest exposure — across the entire portfolio, not just in copper – is Freeport, the big US listed copper and gold producer.
“Why? They are growing their production quite significantly in 2021.
“Copper price is going up, volumes are going up. That equals a very big number.”
Tribeca also likes Aussie listed companies like OZ (ASX:OZL).
“OZ is a very well-run company with growth prospects,” Warren says.
“But BHP, Rio Tinto, insert name of big mining house here – they all want more copper exposure.
“They all want it because they know the structural story playing out for copper is incredibly bullish in the long term.”