Copper is a popular base metal that has been favoured for centuries for its electrical conductivity and low reactivity.
The metal is widely used in building construction, infrastructure, electronics and wiring, transportation equipment, consumer products, and machinery.
Demand for copper is currently subject to a degree of cyclicality, given its wide range of industrial uses which ebb and flow with the state of the broader economy. As such, ‘Dr Copper’ (i.e. the level and direction of copper prices) is often referenced as a barometer of the health of the overall economy. In the near-term, copper demand faces cyclical headwinds from a slowing global economy, although we note China’s re-opening should help to cushion weakness in the rest of the world.
Longer term, the energy transition will underpin significant structural growth in demand for the metal as significant quantities of copper will be needed to modernise electrical grids and energy infrastructure, build new solar and wind energy generation capacity, and manufacture a growing fleet of electric vehicles (EVs).
EVs typically require around 3x more copper than comparable conventional internal combustion engine vehicles. Solar and offshore wind require an estimated ~3x and ~7x, respectively, more copper per megawatt of installed capacity than popular fossil fuel energy sources. Therefore, copper production will need to significantly increase to achieve ‘Net Zero’, with some industry estimates suggesting copper demand will double in the next 20 years. This implies a significant step change in copper production compared to the past 10 years.
Growth in copper demand is expected to outpace new supply over the medium- to longer-term. This is due to declining ore grades (pushing up extraction and processing costs), the shortfall of existing production volumes and committed projects in the pipeline, and the long lead times between discovery and production. According to the IEA, lead times average 17 years.
Given the favourable supply/demand dynamic, we are structurally bullish on the copper price.
Exploring the Majors Copper Exposure
In spite of Australia having the world’s second largest copper reserves behind Chile, the ASX suffers from a scarcity of high-quality pure play copper miners, which was exacerbated by BHP's takeover of OZ Minerals (OZL) which was completed this year. However, the major diversified miners offer an alternate way to get exposure to copper, which is arguably being underappreciated by the market, given their significant investments into ‘future facing’ commodities. We think these miners offer an increasingly attractive way to gain leverage to copper and therefore the energy transition in the local market.
BHP offers by far the most copper exposure of the large diversified miners, in both absolute and relative terms.
BHP Our Pick: Becoming Less Reliant on Iron Ore
The Focus Portfolio retains an underweight to the major iron ore miners (BHP/RIO/FMG) at the headline level, given our structurally cautious stance towards the commodity, with our sector pick being BHP (10% weight). We are constructive on BHP, partly based on the view that the business will soon become a copper producer first and foremost (though we do note the business has no plans to walk away from its profitable iron ore business).
BHP has the largest copper endowment globally based on ownership interests in the world’s largest copper mine, Escondida (Chile), as well as a number of others including Olympic Dam (South Australia), Pampa Norte (Chile), Resolution Copper (USA), Antamina (Peru), and recently acquired OZL assets Prominent Hill and Carrapateena (South Australia). BHP’s operational copper mines are high quality, low cost, long life assets with significant production growth potential, while it also owns a range of exploration assets like its Oak Dam development in South Australia.
According to consensus estimates, BHP will generate more earnings from copper than iron ore by FY25.
BHP’s copper earnings could surpass iron ore as soon as FY24, if we take the near-term bull case.
Under different assumptions for the copper and iron ore prices, BHP’s copper earnings could actually surpass iron ore in FY24.
Although not our base case for FY24, if we assume the copper price averages $4.25/lb in FY24 in line with January 2023 levels, and that the iron ore price trends to its November 2022 lows, hypothetically BHP’s copper earnings would eclipse its iron ore earnings in FY24.
In any case, regardless of the timing, the long-term trend towards copper is clear, and in our view, this makes BHP a more compelling investment opportunity than the other major diversified miners.
Another Way to Play - WIRE ETF
WIRE captures four ASX listed companies, which represent ~8% of the portfolio: BHP, Sandfire, 29 Metals. It is however, classified as an international equity fund, which provides significant exposure to global copper miners.
WIRE ETF Summary:
WIRE captures companies with a significant part of current and future revenues deriving from copper mining or closely related activities, such as exploration or refining.
The Index is weighted according to a company’s free float market capitalisation, with a maximum allocation of 4.75%.
Provides exposure to the largest copper miners throughout the world as well as companies with significant development potential.
Written by
Rob Crookston, Equity Strategist
Rob is an experienced research analyst with a background in both equity strategy and macroeconomics. He has a strong knowledge of equity strategy, asset allocation, and financial and econometric modelling.
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