As with most commodities, copper has had a bit of a rollercoaster year so far; trading within a ~11% range. 3-month futures in the popular red metal are now trading at near 5-month highs and above the psychological $6000pmt level, having gained just under 9% ytd. Better than expected economic expansion in China, the world’s largest consumer of copper, has helped support copper prices. As have recent labour disputes at mines, and shipping disruptions for example.
The imminent launch of the Tesla Model 3 has also given copper prices a boost, as more of the metal will be used in the manufacture of these mass-market battery-powered vehicles, compared with conventional cars. Copper is used in their: internal electronic components, the rotor motor, battery and charging stations. According to a report published last month by consultancy firm IDTechEX, a ‘battery electric vehicle’ (BEV) requires as much as 83kg of copper in its construction. The study estimates that by 2027, 27 million EVs (including cars, buses and hybrids) will be on the roads, roughly 9 times as many as there are currently. Copper demand is therefore estimated to increase from 185,000 tonnes currently, to 1.74m tonnes in ten years. These estimates do not include the charging infrastructure, which can require up to 20 kg of copper per unit. No doubt demand for copper will be sustained in the longer-term, with the likes of France vowing to ban sales of petrol and diesel vehicles by 2040.
According to forecasts, current mines will not be able to meet the increase in forecast demand, therefore mine expansions and discovery projects are necessary. This would push copper prices higher, with consumers absorbing the higher costs involved with new projects and extraction, for example. Off the back of the higher expected global demand, Glencore invested in a 5% stake ($21m) in Brazilian producer, Paranapanema last Friday. In its annual report released in March, the Swiss mining group acknowledged that copper’s ‘wall of supply’ has failed to emerge after demand ‘sprang back to life’ in the final months of 2016.
One of our favoured holdings in Southern Copper 7.5% 2035’s has rallied to 4-year highs this month. The Baa2/BBB+ bond continues to offer exceptional risk-adjusted expected returns of around 14.5% with an attractive yield of 5.25%, and 3.3 notches of credit notch cushion. The US company is headquartered in Phoenix Arizona with mining activity predominantly undertaken in Peru and Chile. Meanwhile, the world’s largest copper producer, Chilean state-owned Codelco, has seen its bonds have a good run so far this year; they are just off the year highs. We like the Codelco 6.15% 2036 issue which trades at a spread of 190bps over US Treasuries, and looks very attractive against its peers, which are priced around 80bps over. We calculate that this A3/A+ rated bond has the potential to gain another 18 points in capital appreciation terms, to reach fair value. Its yield of 4.45%, and 4.3 notch cushion are also very favourable factors.