How AI and EVs are boosting demand for copper

By Myra P. Saefong

'Novel' sources of demand look to support long-term copper usage

Copper prices have outperformed both gold and silver so far this year, as traders bet on growing, long-term needs for the industrial metal in artificial intelligence and electric vehicles.

The copper market has reached an "Isaac Newton moment" where "the apple has fallen onto the heads of global commodity traders and end users, and they're just now waking up to the reality of enhanced future demand," said John Caruso, senior market strategist at RJO Futures.

On Wednesday, copper for July delivery (HG00) (HGN24) settled at $4.49 a pound on Comex. Most-active futures are up 12% so far this month and trade 15.3% higher this year.

"'Dr. Copper' has a PhD in economics and with the rise in prices this year, it is saying that the tide is turning in global manufacturing activity," said David Waugh, quantitative analyst and vice president at Neuberger Berman.

In the U.S., Europe, and China, purchasing managers' index readings year to date point upwards, he said, "bolstering what copper is telling us in real time."

Copper has seen even larger year-to-date percentage gains than gold and silver. June gold (GC00) settled at $2,338.40 an ounce Wednesday, up 4.5% for the month and 12.9% for the year, after last marking a record-high settlement on April 19 at $2,413.80. Silver for May delivery (SIK24) (SI00) settled at $27.35 an ounce, trading about 9.8% higher this month for year-to-date rise of 13.5%.

Related: Copper's record as a stock market and economic predictor is tarnished

The copper market has reached an 'Isaac Newton moment' where 'the apple has fallen onto the heads of global commodity traders and end users, and they're just now waking up to the reality of enhanced future demand.'John Caruso, RJO Futures

"We have seen signs of improvement in the U.S. and Chinese manufacturing data, and of course the overall dovish policy stance by the [Federal Reserve], in the face of above-trend economic growth and inflation still above target, has helped fuel the demand for the metals markets," Caruso told MarketWatch.

Futures demand for copper looks "increasingly inevitable" with the artificial intelligence (AI), electric vehicle (EVs), and the "decarbonization revolution as a whole," he said. "Copper will undoubtedly play an integral role in this transition."

A century of demand growth

One of the most "underappreciated aspects of copper is that global demand has been growing very steadily for more than 100 years," said Matthew Fine, portfolio manager of the Third Avenue Value Fund TAVFX. "Wherever there is economic development, particularly from lower income countries becoming more modernized, there is significant growth in copper consumption."

Data from the International Copper Study Group released in late March suggest that apparent world refined copper usage grew about 6% in January - with apparent Chinese demand up by roughly 12% as usage in the rest of the world was estimated to have declined. World refined copper production increased by about 5% that month.

China has "pressed the invest button lately, but this time not in property buildup but rather in manufacturing," said Neuberger Berman's Waugh.

"There is a massive shift going on in China's economy, reducing its reliance on property as the engine of growth and instead emphasizing the build up of green infrastructure," he said. "As we see in Chinese on-shore inventory data, China is stocking up on whatever copper it can find to feed this upcoming manufacturing and green demand infrastructure boom."

A global surplus in copper fell to about 84,000 metric tons in January, from a surplus of 109,000 in January 2023, preliminary data from ICSG show. For the year 2023, the world saw a total deficit of 85,000 metric tons, following deficits in each of the previous three years.

Copper supply is "crimped from a lack of new mine projects coming online, challenges in mine production such as operational disruptions and delays, and an erosion of base mine production as ore quality declines," said Waugh.

"Despite some new projects and expansions, we expect the overall growth in mine supply to be limited, falling short of meeting demand and driving up prices until a balance is reached," he said.

'Novel' sources of demand

Some aspects of current global economic growth are particularly helpful for copper specifically, said Third Value's Fine, with rampant data center growth driven by AI, as well as renewable energy spending, and electrification, in general, all "incredibly dependent" on copper.

He referred to EVs and renewable power growth in already rich and developed countries as "large novel sources of demand."

For EVs in particular, he pointed out that in 2023, the global penetration rate was roughly 12% of all passenger vehicles sold, which is "quite a lot" of EVs, said Fine. As a rule of thumb, Third Avenue Management estimates that 180 to 190 pounds of copper is used in each battery electric car, which is more than 3.5 times the amount used in an average internal combustion vehicle, he said.

Growth in EV sales remain "robust" and may reach around 17 million in 2024, which would account for more than one in five cars sold worldwide, according to the recently published International Energy Agency's Global EV Outlook 2024 report. In 2023, global sales neared 14 million - 18% of all cars sold, it said.

In China, more than 60% of EVs sold last year were less expensive to buy than their conventional equivalents, the report said. Cars with internal combustion engines remained cheaper on average in the Europe and U.S. but "intensifying market competition and improving battery technologies" are expected to reduce prices in the coming years, the report said.

Read: Smart ways to shop for used EVs, which now cost half as much as they did in 2022

The AI sector, meanwhile, is "wildly data intensive" - that encourages rapid data center capacity growth globally, with those data centers "ravenously" consuming power, he said. This "all requires copper, not just in the data center itself, but more so in connections to a power grid, back-up generators, and such."

With rapidly growing electricity demand, "it is reasonable to assume that copper plays an important role," Fine said.

See: AI is fueling a gold rush in new data centers, the hottest buildings in real estate

-Myra P. Saefong

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

04-27-24 0920ET

Copyright (c) 2024 Dow Jones & Company, Inc.