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Good time to buy copper?

Investment | Commodities Helpful? 6

Asked by verityhickman, submitted 16 February 2011.

Open Quote I understand there's a worldwide shortage of copper. Is copper a good investment now?End Quote

Answered by Justin on 18 February 2011

As with most commodities I think the prospects for copper over the next 20+ years are very good, thanks to growing demand from emerging countries as they continue to develop.

Copper is widely used in electronics and construction, so benefits from countries that are building their infrastructure and demanding more electrical goods. If we see a growth in electric cars that could help too, as these use 2-3 times more copper per car than standard vehicles.

So there's little doubt that demand will increase over time, but what about supply?

While there's enough copper on Earth to last for millions of years, at the moment it's only economically viable to extract a fraction of that. And currently demand seems to outstripping supply - by around 250,000 tonnes last year and an estimated 500-600,000 tonnes this year. To put this into perspective, annual output is currently about 19 million tonnes a year.

So provided demand continues to outstrip supply the prospects look good. Is this likely?

The growth in demand has primarily come from China, with estimates suggesting China accounts for around half worldwide copper demand. While demand from china (and other emerging countries) will almost certainly grow long term, there is a risk that rising inflation in China will prompt the Chinese Government to slow things down for a while, which could reduce demand for copper.

On the supply side, it seems there's not much scope to increase supply over the next couple of years (although solving labour disputes could help a bit), but the investments copper miners are making to increase capacity (they're tempted by high coppers prices) could start to boost supply significantly by around 2014-15. Copper can be recycled very efficiently and accounts for around 1/3rd of supply, but it seems unlikely this will increase in a major way.

We also need to bear in mind that some of the recent demand growth is due to investors, which tends to be far more fickle than 'real' demand. If these investors decide to keep buying or dump their holdings, this will also affect demand for better or worse.

Putting all this together there's a reasonable argument that prices might continue to rise for the next couple of years then start to wane for several years, as plenty more supply comes on tap, before rising again as demand growth starts to outpace the increased supply.

However, these things are difficult to predict as there are lots of unforeseen factors that can affect supply and demand along the way. So while it's tempting to bet on copper, I'd keep the stake fairly small.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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