Copper prices have pulled back since a recent spike above $11,000 per tonne in March, but Goldman Sachs says that the ride higher isn’t over in 2022. Dramatic inventory shortages are to blame. In a note to clients, Goldman analysts said that they see a convincing case for prices to return to record highs by the end of the year. The bank has now revised its number higher to $13,000 per tonne.
Back in February 2022, Goldman indicated that a serious “scarcity episode” was occurring when stocks declined to about 200,000 tonnes. That amount was just enough to cover three days of global consumption, an extremely tight supply that could create chaos if not replenished fast enough.
The analysts boosted the anticipated deficit of refined metal for this year from previous forecasts by a factor of two, to 374,000 tonnes, and increased the shortfalls predicted over the following two years.
The investment bank’s three, six, and 12-month price targets are now all higher. Importantly, the bank sees a new price record in the next three months. That $13,000 price target? Analysts expect copper to climb to that level in just one year.
Another key indicator of the troubles ahead was what happened in March when stocks again declined on exchanges around the world. This is the first time in a decade this has happened considering this is usually the time that copper has a “…seasonal surplus phase.”
Goldman Sachs has historically been the biggest bull for copper, and it’s not the only one. JPMorgan increased its price target for the red metal, also due to a supply crunch.
The world is on an unprecedented path of growth and industrialization, and that is good news for copper bulls as demand continues to surge. Electric vehicles, batteries, 5G technology, and other factors are all working in favor of those who see higher prices ahead.
Beyond those macro factors, the supply crunch felt around the world is not expected to get any better. Factors such as coronavirus-related production delays, China’s crackdown on environmental violations, and a lack of new mines coming online are all working against those who need copper.
Inventories on the LME, the world’s largest copper market, have declined sharply since February, and are now at the lowest level in a decade. Inventories in China, the world’s largest copper consumer, have also been drawn down to extremely low levels.
While a surge in prices could be bad news for companies and consumers who need the metal for various reasons, it would be good news for producers. Companies such as Freeport-McMoRan (NYSE:FCX), Southern Copper (NYSE:SCCO), and Antofagasta (OTC:ANFGY) would all benefit if prices were to continue moving higher.
New copper projects are also scarce, and the explorers bringing new projects to fruition are finding valuations are soaring in the current climate.
Diavik property, Canada. Source: Rio TintoCopper stocks are on a tear this year, in no small part due to the rising price of copper as supply shortages and a surging demand boom converge to create some of the best conditions in recent history for stocks. While the current climate has been more than favourable for copper stocks, they have often had an advantage historically over gold and other precious metal stocks due to the red metal’s multiple industrial uses.
Producing iron ore, copper, diamonds, gold, and uranium, Rio Tinto is one of the largest mining companies in the world. The stock has doubled in the past year, reflecting the company’s return to near-full production capacity as well as a lifting of lockdown restrictions in the 35 countries it operates in globally.
With mining operations located in Peru and Mexico along with exploration operations in both those countries plus Chile, Southern Copper is one the largest integrated copper producers. The last year has seen SCCO stock soar 110%. Investors who have held the stock must be happy to see their positions double over the past 12 months.
As a junior mining company, Solaris Resources holds a large amount of potential. The company is focused on its flagship Warintza project in Ecuador, for which it has reported positive assay results as it continues to expand the project to adjacent sites. Investors seem to like the progress, because the stock is up over 1000% since the IPO less than a year ago.
This company operates large and long-term geographically diverse assets that hold reserves of copper, gold, and molybdenum. The company’s scale is used to maintain a dominant position in the market, using properties like the Grasberg mineral district Indonesia, which is one of the largest copper and gold deposits in the world, to fortify its balance sheet. FCX stock is up 370% in the past year, as investors continue to pile into this veteran mining company delivering year after year.
Mining companies exploring and producing base metals like copper usually have higher dividend yields than hedges against inflation like gold stocks. They are also generally better value as they sit cheaper in relation to earnings and cash flow. With a low P/E, copper stocks usually have less distance to fall if markets take a hit, and the upside is higher when the stock runs. With lower risk and higher potential reward, copper stocks are always in favour with the investing community for short, and long-term plays.
Short-term, copper should be able to benefit from the rising demand coming from increased battery production and clean energy storage solutions. The increase of electric car sales and the electrification of infrastructure and power grids around the world requires huge amounts of copper to transport and store the energy. Labour shortages and technical delays in some regions of the world have also contributed to a general slowdown in copper production, but as 2021 rolls on, the environment is looking strong for copper mining companies and their stocks.
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|Lincoln Minerals Limited