The Elemental Attraction of Copper

Brandywine Global on bonds from copper producers as an investment opportunity.

    Brian Kloss

    Brian KlossBrandywine Global

    Copper has become, quite literally, a hot commodity for bond investors. Bonds related to the copper market present a compelling alternative, one that we see supported by both strong fundamentals and macroeconomic trends, in the near term as well as longer term.

    Near-Term Support

    Near term, the global economic recovery is driving demand for the metal as manufacturing ramps back up. The successful coronavirus vaccination programs underway should continue to make gains against combatting the pandemic, reducing fear, and restoring consumer sentiment and behavior. In turn, we expect to see a stunning economic upswing and a supportive environment for the copper market and for investors as the year unfolds.

    Longer-Term Trends

    Longer term, copper is an important component in renewable energy and electromobility. For example, electric vehicles contain about triple the amount of copper than in conventional autos. As more electric cars are sold, more copper is needed to keep up with demand. As countries move toward building green economies, demand for copper should continue. However, new copper sources do not come online overnight. Another trend working to solidify copper’s strategic importance and future demand for the metal is the investment backlog around infrastructure. There is an incredible amount of fiscal stimulus being put to work to counter the fallout from the pandemic, with some of this money earmarked for infrastructure projects.

    This stimulative fiscal policy coupled with the greatly relaxed monetary policies around the world should also provide a supportive backdrop for the commodity complex, particularly if the U.S. dollar remains weak. Early indicators suggest that inflation could become an issue for investors again in the medium to long term. Copper investments are also interesting in this context.

    Supply Deficit Remains

    Copper prices already have risen significantly in recent months. However, we believe strong demand and an ongoing supply deficit will continue to drive prices. The reasoning behind this dynamic is the long development phase that is often typical of new mining projects. It is not unusual for there to be 10 years from the discovery of copper resources to the start of production. Under normal conditions, it can be difficult for copper supply to keep up with demand. Given expectations for a sustained surge in demand, it should not be surprising for the copper supply deficit to continue for some time.

    Copper Spot Price versus 5-Year Breakeven RateLeft: USD/lb., Right: %, 12/29/2015 - 1/29/2021

    Source: Bloomberg Finance L.P.

    Copper Supply Deficit Forecasted as Demand IncreasesLeft: %, Right: Thousand Metric Tons, As of 12/31/2019

    Source: Bloomberg Finance L.P.

    Managing Risks in Commodity Investments

    While there are large, well-known names in the industry, there are also a number of smaller producers that are introducing new mines into production, providing investors with some compelling opportunities. Investing in companies at different stages of development can create an attractive risk-reward profile but even with expectations for strong demand, new commodity projects carry high risk due to many unforeseeable challenges.

    We believe bonds from copper producers present an interesting investment opportunity. However, it is important to have a solid understanding of the complexities of commodity production and the macro conditions driving demand and supporting fundamentals. A diversified approach and a detailed analysis of the specific conditions surrounding each individual project are also critical.




    DEFINITIONS

    The spot price is the current price in the marketplace at which a given asset—such as a security, commodity, or currency—can be bought or sold for immediate delivery.

     

    WHAT ARE THE RISKS?

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