Demand for copper is recovering, especially in the industrial sector. It is a versatile metal used in residential construction, electronics, electrical conductivity, automobiles and infection control. It will benefit from a push for electric vehicles and sustainable energy, upgraded infection control due to the coronavirus pandemic, and a rebound in global economic activity. If you want to include copper or any base metal in your portfolio, it might be wise to talk to a financial adviser and keep up with the copper market.
Of the commodities known as industrial or base metals, only iron ore and aluminium are in higher demand than copper. Copper is found in air conditioning units, water pipes and appliances in homes. Electric cars will contain more copper than gasoline-powered ones. Copper will be needed for electric car charging stations and many future infrastructure improvements. Any pick-up in economic activity typically boosts residential construction and sales, and copper would benefit. Because viruses and bacteria can’t live on metal, hospitals are changing many surfaces that come into contact with copper. All this has led to a potential increase in demand for copper and more interest from investors.
The copper market
Copper is versatile and abundant. We mine only a fraction of the world’s copper supply. One reason is that copper is recyclable. Once in circulation, it has multiple uses and can be recycled. Copper has mining problems. Copper deposits are typically only 0.05% to 1% copper ore. Extracting that small amount of saleable ore requires a highly capital-intensive process.
There are also potential supply problems. Many mines have been closed during the coronavirus pandemic, which has hit copper supplies hard. Labor issues have also been a factor and may come up in the future. Supply problems have added to the volatility.
Followed by Peru, Chile is the world’s biggest copper producer, . Not only is Chile no. 1 in copper mining, it has the most copper reserves. Developing countries, especially China and India, are big users of copper because of their infrastructure needs, while China is the world’s largest copper importer. As the U.S. moves toward improving its infrastructure, demand for copper will grow. Copper is also heavily traded in commodity and futures markets, which can mean volatile prices. But copper is a hedge against inflation.
Key indicators for the copper market
If you are going to invest in copper mining securities, it is important to look for high leverage. If debt-to-assets ratios or debt-to-equity ratios are out of range compared to the rest of the industry, that’s a warning sign. When copper prices are low, companies can accumulate large amounts of debt because the necessary capital investment is so high and the company may not have sufficient cash flow.
Attrition is also a factor. These items reduced net income. It is wise to look at a company’s income statement and analyze EBITDA rather than relying solely on net income. EBITDA is earnings before interest, taxes, depreciation and amortization.
Comparing cash flows between companies in various sectors of the copper industry will also yield information on net income and non-cash charges such as depreciation. Analyzing a company’s debt related to EBITDA is important because it compares debt to earnings before eliminating the large cost of depreciation and amortization.
If a copper company is trying to expand through acquisitions, look carefully at acquisitions before investing. Traditionally, copper companies have not had much luck with acquisitions as they expand outside their industry.
Different sectors of the copper industry may have different standards for these indicators, so comparisons with specific segments of the copper industry are important.
The risks and benefits of copper investment
Because of the nature of the copper mining business, investing in copper is inherently risky. It is expensive because of financial requirements. It requires companies to take on a lot of debt, which can lead to bankruptcy. Copper mining is environmentally and socially controversial. A copper mine covers a large geographical area. This leads to corporate governance problems.
Chile is embroiled in Labour disputes with copper miners. If copper prices fall, supply could slow because companies can’t afford to mine. Uncertain global economic activity will also slow copper supply, as much of the metal is used in residential construction and cars. Unpredictable events such as a pandemic can lead to mine closures and supply shortages.
Copper is a frequently traded commodity. However, due to the limited number of companies in the industry, there are few traditional copper investment vehicles. Investing in available ETFs or exchange-traded notes is less risky. Even so, familiarity with the copper market is essential.
Despite the risks, there are benefits to investing in copper. Global demand should soar thanks to a global recovery and heavy use of copper in housing and construction and many consumer industries. As we use more renewable energy and switch to electric cars, more and more copper will be needed. As China develops further, it will continue to be a significant importer of copper.
Copper can provide individual investors with a diversified portfolio. Although scarce, the price is lower than gold and silver. It provides you with a way to enter the semi-precious metals market in a more economical way to invest. Unlike gold, however, copper is a counter-cyclical metal. Copper, on the other hand, is cyclical. It moves with the broader market.