The Days Ahead:

  • Construction spending and new jobs.

This Week:

  • Copper prices have risen recently.
  • “Dr. Copper” was a good recession and recovery indicator in the past…
  • But no longer.
  • It’s more of a typical short squeeze than an indication of big growth.
  • We look at the new demand sources for copper.
  • The U.K. government is throwing in the towel and calling an election.
  • Tories have been in power for 14 years and the economy is in bad shape…
  • Things can only get better.
  • U.S. GDP was revised down, but it’s neither a surprise nor a worry.

Dr. Copper Is Wrong

For years, investors gave copper an honorary PhD for its ability to forecast recessions. The reasoning was simple. Copper is a widely used metal, particularly in housing, construction and electrical engineering. Falling prices meant manufacturers were seeing declining orders with weaker growth just around the corner. Higher prices signaled more orders, strong demand and a manufacturing and housing revival.

Here’s an example showing the one-year change in the price of copper against the one-year change in the S&P 500, which is a reasonable proxy for economic growth:

Figure1 Copper and SPX
Source: FactSet, 05/28/2024

Yes, we’re guilty of the overlay chart. The data are on two different axes, with copper, in the blue line, showing a lot more volatility than the stock market. Still, it’s a reasonable assumption that a basic raw material feeds into broader economic growth. You can overlay other charts like purchasing managers’ new orders, China’s industrial output, the dollar, and oil and soon ascribe the wonderful predictive powers to copper. Some might see this next chart, then, as a good sign.

Figure2 Copper Continuous
Source: FactSet, 05/28/2024

It shows the copper price up 27% this year and up 50% since the post-Covid-19 lows. Prices tend to dip once recessions are underway and rise, either at the end of recessions or way before. Copper’s predictive chops are a bit dubious and it’s a brave investor that puts money on a trade using copper as a buy or sell signal.

But what’s going on with the recent price spike? And should we be concerned?

The quick answers are: it’s a supply logjam and, no. Here’s why.

First, we’d say that with commodities you should always look at the real price. Copper is at a record high in nominal terms but in inflation adjusted terms it’s 25% below what it was in 2006 and 50% below its all-time high in 1974.

Second, the world has a lot of copper. Reserves are around 5,000 million tonnes and usage around 28 million tonnes. It’s not going to run out. About 60% of all copper is recycled, meeting 30% of market needs every year. It’s re-used infinite times without losing any conductive properties.

Third, copper is a very, but not the most, conductive metal. Silver and gold are ahead but, of course, more expensive. Copper is corrosion resistant and malleable, so you can bend it into pipes or stretch it out and use it for cell phone circuity. If you plug 380,000 volts into a one-inch copper wire 100 miles long, it will lose only 0.0012% of its power at the other end. Some 379,996 volts will come out the end, a drop of four volts.

There are substitutes for copper if supply was to change suddenly. Using aluminum in the same experiment, the voltage loss over the same 100 miles is five volts. Not bad. Copper is around $4.80 a pound and aluminum is $0.83. The reason we don’t use aluminum in electric applications is that you need more of it for heavier loads and weight is important in things like electric vehicles (EVs) and wiring. If copper prices became too expensive, however, engineers would have a strong incentive to start using substitutes, especially one with ample supply and proven performance. Substitution, especially one easily implemented, should keep the copper price from escalating.

Fourth, there’s a bull story running around that copper is the “new oil” and in desperately short supply. The case is that copper demand is about to power ahead because of new construction in China; big infrastructure spends on new green economy projects and electrification; data center storage, especially for new AI centers; and transport, notably EVs.

It’s certainly true that while the use of copper in construction is up around 6% in the last 10 years, power utility use is up 60%, automotive use up 30% and cooling equipment use (for those data centers) up 31%.

For example, a Tesla car uses around 190 pounds of copper. If Tesla can meet its 2030 goal of producing 20 million cars a year, it would use 1.6 million tonnes a year or 6% of the world’s supply.

Figure3 Copper by Country
Source: International Copper Association, Tesla Annual Report

There’s about half an ounce of copper in an iPhone 14, or about 6% of its weight. Apple uses recycled copper for the 240 million iPhones it ships. But the other 1.1 billion require around 1,500 tonnes of copper every year.

Data centers use a lot of copper. A standard one-megawatt (MW) data center (the MW is the amount of power to run the data center) center uses 40 tonnes of copper. An AI data center uses 2,200 tonnes. Demand is expected to grow by 270% in the next 15 years.

Solar power systems use 5.5 tonnes of copper for every megawatt (MW) hour generated. There are plans to build around 25,000 MW of solar energy capacity in the next few years. That’s another 140,000 tonnes, just for the U.S.

A wind turbine needs 0.9 tonnes of copper and produces 2.5 MW of power. There are plans to build 112,000 turbines in the next few years. Another 60,000 tonnes of copper – just for the U.S.

A final source of demand is evolving technology for a longer life, quicker recharging and safer batteries. A back-up home storage battery you may stick on the side of your house has 8 pounds of copper. An EV charging station needs 17 pounds of copper and the Department of Energy thinks we need 28 million of them by 2030 up from 61,000 now. Another 224,000  tonnes of copper.

It’s easy to push a very bullish case for copper demand. Mind you, all those scenarios are just working backwards from projections way into the future. It’s highly unlikely, for example, that Tesla will be building 20 million cars in six years’ time (they’ve stopped talking about it) or that the U.S. can really build 19,000 EV charging ports a day for the next six years. We’d also note that less than three years ago, the big theme that lithium and cobalt prices were going to go through the roof because of battery demand. But lithium prices are down 80% and cobalt down 70% from their 2022 highs. Albermarle, a lithium mining company, rose 480% and fell 70% in the same period.

Copper supply is plentiful. Many of the largest copper mines have years of supply and at the right price, can come on line in a year or so. Companies seem relaxed too. Here are the capital expenditure (CapEx) plans of some major public copper miners, Freeport-McMoRan, BHP, Southern Copper and AngloAmerican.

Figure4 Copper Companies' Capital Expenditure
Source: FactSet, 05/29/2024

CapEx has risen but by far less than previous cycles and remains well below pre-Covid-19 levels. If these companies really expected high prices for years, they would invest in more capacity. Instead, they’re trying to buy each other. BHP, number two in the industry,  recently announced plans to acquire AngloAmerican, the number four. Mergers don’t expand capacity.

Finally, the “new oil” argument doesn’t work. We use oil once to create a unit of energy. Then it’s gone. Copper lasts decades, is easily recycled, and is cheaper to recycle than to mine.

We think the copper price run is a good old-fashioned squeeze. There has been a rush of speculative buying, with open interest (meaning options that have not closed) rising 20% in the last few months. That’s usually hedge funds looking for a quick turn. We also know that storage levels are down 40% since December 2023 at the London Metal Exchange and down 35% in Japan. China recently announced that local governments should start buying more land to develop. China uses for half the world’s copper. Money rushed in expecting new demand from low inventories started a speculative bubble. It will pass. It’s not the “new oil” and prices aren’t about to double as some bulls state.  

The long-term demand for copper is real but not in the timescales and volumes bandied about. There’s a lot of copper, it’s substitutable and it’s recyclable. Those forces will keep a check on prices.

Our Picture This Week

The art at the top Is by Andre Derain, who worked with Matisse and de Vlaminck around 1905. They called themselves the Fauvists which loosely translates as “wild beasts.” It was a time when artists were looking for catchy names and they thought the bold colors, flat compositions and broad-brush strokes were wild and crazy. The name stuck.

Derain worked in London and the above picture is of the Houses of Parliament, one of the city’s landmarks. It’s also been home to the most inept government in British history.

Since 2010, the Tory government has had five prime ministers (PMs), including one who lasted less than 50 days. Two resigned, one was ousted when found lying to Parliament, another defenestrated when the bond market plunged after a disastrous budget speech and one remains. Their average tenure was about two and half years. The previous five PMs averaged seven years. During the five Tory governments, real wages remained flat since 2008, inflation peaked at over 12%, home prices went from six times annual earnings to over nine times, the percent of young people owning their own home dropped from 30% to less than 20%, and GDP growth dropped from 2.7% in the prior 14 years to 1.3%. U.K. GDP is only 1.3% larger than pre-Covid-19 levels. The U.S. is 9.5% larger.

U.K. quarterly GDP per capita looks like this:

Figure5 UK GDP per Capita
Source: FactSet, 05/30/2024

The arrow marks January 31st, 2020, when Brexit came into law. The per capita output has yet to top the peaks of 2019.

It goes on. Sterling is down 35% since 2010. The stock market is up 57% while the S&P 500 is up 400%. U.K. goods exports are down 25% and the share of exports headed to the EU fell from 54% to 41%.

The legacy of the government is Brexit. The U.K. surrendered access to the world’s largest free-trading block for a utopia of bi-lateral free trade agreements with every other country. None materialized. At the latest count it lost the EU market, with a GDP of over $20,000 billion, and gained New Zealand with an economy of  $248 billion.

The U.K. lost 1.8 million jobs because of Brexit of which 390,000 were in financial services, the U.K.’s largest and highest paying private sector employer. Both JP Morgan and Goldman Sachs moved their European headquarters from London to Paris. Some 80% of companies say supply chains were seriously distorted by Brexit and that they were less profitable as a result. The average British citizen is $2,500 worse off now than in 2015.

Finally, last week Prime Minister Rushi Sunak threw in the towel and announced a general election for July 4th. The Tory party will certainly lose given their 50-year low 19% approval rating. The probable Labour government under Sir Keir Starmer already has widespread endorsements from businesses, is popular and seen as more competent, mainly because he’s not a Tory. But neither Sunak nor Starmer have fought a general election before. Mistakes will be made. But probably not on the scale of the last 14 years.

The Bottom Line

It was a short trading week. The U.S. stock market adopted a new T+1 trading rule which shortens the time between buying and paying for a stock. It’s not a big deal and is meant to help short-term liquidity. You can ignore it unless you’re an overseas investor. Then it becomes more complicated.

First quarter U.S. GDP growth was revised down from 1.6% to 1.3% but this was expected. The first print had huge data gaps, especially on the trade side. The 10-year Treasury reacted well mainly on the simple basis that slower growth means possible rate cuts. The treasury market has traded between 4.3% to 4.7% since mid-March. The GDP news was more noise than signal.

The S&P 500 had a bumpier ride down 1.8% from the high set on May 22. But news was short with no major company announcements. Next week’s payroll numbers should tell us more.

Art of the Week: Andre Derain (1880-1954)

Please read important disclosures here.