Copper demand is poised to increase over the next decade. Despite facing challenges in traditional cyclical sectors like construction, manufacturing, and appliances, copper demand should remain resilient, driven by an overriding trend: the global energy transition.
The growing global adoption of renewables, grid expansion, and electric vehicles (EVs) is serving as a powerful counterbalance to the weaknesses expected in traditional copper-consuming industries (like construction).
China, a key player in the copper market, is undergoing a notable shift in its once dominant construction sector, which significantly drove copper demand in the past.
A bear case for copper has been that a contraction in household formation in China would offset the demand for copper from electrification.
However, China's construction sector now accounts for only about 7% of global copper demand, while the global demand share from EVs and renewables has surged to ~13% in 2023, with growth exceeding 20% per annum. By 2030, the energy transition share of copper demand is expected to be ~22%. We see upside to these estimates.
Longer term, the energy transition will underpin significant structural growth in demand for copper as significant quantities of the metal will be needed to modernise electrical grids and energy infrastructure, to build new solar and wind energy generation capacity, and to manufacture a growing fleet of electric vehicles (EVs).
EVs typically require around 3x more copper than comparable conventional internal combustion engine (ICE) vehicles.
Solar and offshore wind require an estimated 3x and 7x more copper, respectively, per megawatt of installed capacity than typical fossil fuel energy sources. Therefore, copper production will need to significantly increase to achieve ‘Net Zero’.
Growth in copper demand is expected to outpace new supply over the medium to longer term. This is due to:
Long lead times for new mines: Developing a copper mine is a complex and time-consuming process. It involves exploration, permitting, construction, and commissioning, which can take several years to complete. According to the International Energy Agency (IEA), lead times average 17 years from discovery to production.
Declining ore grades: The average grade of copper ores has been declining over the years, meaning that miners need to process more ore to extract the same amount of copper. This not only increases operational costs but also requires additional energy and resources, which may not be economically viable at current copper prices. This should shift the incentive price for copper higher, increasing the long-term price.
Given the favourable supply-demand dynamic, we are structurally bullish on the copper price.
Sandfire Resources (SFR) has been added to the Focus Portfolio at a 2% weighting. SFR is one of the only ‘pureplay’ copper miners on the ASX, providing the highest quality exposure to the commodity, in our view. The company operates two high quality assets: MATSA in Spain, which currently accounts for the majority of SFR’s production; and Motheo in Botswana, which is in the early stages of ramp-up.
Wilsons have initiated on the stock at a $8.45 price target, implying 36% upside.
We are attracted to SFR for the following reasons:
To fund the addition of SFR, we have trimmed BHP’s weight in the Focus Portfolio by -2% to 8%, which leaves our total resources weighting unchanged at 28.5% (a slight overweight to the market). BHP has outperformed the ASX 300 over the last 1/3/6 months amidst resilient iron ore prices, which provides a good opportunity to take proceeds from the company to re-allocate elsewhere.
A key appeal of BHP (compared to the other majors) is its growing exposure to copper, although as a ‘pureplay’ miner, SFR provides more direct exposure to the commodity, which is attractive considering the favourable structural outlook over the medium to long term.
Rob is an experienced research analyst with a background in both equity strategy and macroeconomics. He has a strong knowledge of equity strategy, asset allocation, and financial and econometric modelling.
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