There are no major flaws in the logic of the copper market situation.

Copper, as an important industrial metal, has been continuously rising in price. Chilean President Gabriel Boric explicitly stated, "We have noticed the rise in copper prices."

Historical data shows that copper prices closely follow the trends of the manufacturing Purchasing Managers' Index (PMI) of China and the United States. Currently, the ISM Manufacturing PMI in the United States has returned to the expansion-contraction line after 16 months, and China's manufacturing investment growth rate in January-February reached 9.4% year-on-year, supporting the fundamentals of copper prices with improved expectations for the macroeconomy.

Driven by macroeconomic sentiment, commodities that symbolize economic and inflation expectations, including gold, crude oil, and overall non-ferrous metals, have shown significant upward trends. For example, international gold prices continue to reach historic highs without any signs of stopping, and the three-month futures aluminum on the LME has reached its highest level since February 2023, while the three-month futures tin has reached a 22-month high.

This short-term rise well reflects the financial attributes of copper. For example, many investors who are hesitant to enter technology stocks such as Nvidia when stock prices are high may choose to invest in copper and copper-related stocks. In a sense, copper is a competitor to AI in the investment market.

This actually corresponds to the deeper reasons behind the current rise in copper prices, which is the significant growth in demand for copper from emerging industries such as new energy and artificial intelligence, determining its continuous price increase.

New Demand

Electricity becomes a new driving force for economic development.

Copper is a very important industrial metal with electrical and thermal conductivity second only to silver, excellent ductility, malleability, and corrosion resistance. It is a primary component in many alloys and is widely used in industries such as construction, machinery, and electricity.

It can be said that the changes in copper demand are closely related to the global economic environment.

According to data from the International Copper Study Group (ICSG), global refined copper consumption in 2023 was 27.013 million tons, a year-on-year increase of 4.6%. China is undoubtedly the world's largest copper consumer, with consumption accounting for over 50%.

Currently, China's economic growth drivers are at a critical juncture of transitioning from "old forces" such as real estate and infrastructure to "new forces" such as wind power and electric vehicles. The destination of copper's end consumption also reflects the changing industry development trends.

According to SMM data, in 2023, China's refined copper consumption reached 15.22 million tons, a year-on-year increase of 4.5%. The proportions of refined copper consumption in the fields of electricity, household appliances, transportation, construction, machinery and electronics, and other sectors were 46.3%, 13.9%, 12.7%, 8.1%, 8.3%, and 10.7% respectively.

Even in the era of old forces, electricity remains the primary end application for copper, with 28% of global copper and 38% of China's copper being consumed by the electric power industry.

The growth of electricity demand and copper demand resonates with each other. Both emerging industries, such as new energy vehicles and artificial intelligence, which are highly anticipated by both China and the United States, rely heavily on electricity and copper for their development.

Key components of new energy vehicles, such as batteries, electric motors, and high-voltage connectors, have increased the demand for copper, resulting in a copper usage 3-4 times that of traditional vehicles. According to ICSG, the copper usage per vehicle for traditional cars is 23kg, while for plug-in hybrid electric vehicles and pure electric vehicles, it has increased significantly to 60kg and 83kg, respectively.

In 2023, global sales of new energy vehicles reached 13.6746 million units, a year-on-year increase of 35.75%. As the largest producer and seller of new energy vehicles, China's production reached 9.58 million units, a year-on-year increase of 35.83%, with pure electric vehicle production increasing by 22.63% and plug-in hybrid vehicle production increasing by 81.17%.

It is not difficult to imagine how much copper has been consumed in the production of new energy vehicles, not to mention the subsequent copper consumption in the electricity sector for charging and battery swapping after these vehicles hit the road. According to the International Energy Agency's prediction based on the current global electrification vision, global copper demand will reach 40 million tons per year by 2050.

Although there have been some trends of reverse electrification in European and American countries recently, with local new energy vehicle brands such as Tesla facing layoffs, the same countries are now heavily betting on artificial intelligence, which also has a huge demand for electricity.

Training large language models like GPT-3 requires nearly 1,300 megawatt-hours of electricity, equivalent to the annual electricity consumption of 130 American households. The locations of data centers for companies like Google have even sounded alarms for electricity shortages.

So the demand for copper in the artificial intelligence industry is only increasing. According to a report by Morgan Stanley, the demand for copper in AI data centers may increase from 200,000 to 500,000 tons per year in 2023 to 500,000 to 1.2 million tons in 2027, with a compound annual growth rate of 26%.

By 2027, the demand for copper from AI data centers may account for 3.3% of global copper demand. In comparison, the demand for copper from electric vehicles may only account for 5.2%, but the overall growth trend will remain unchanged.

Copper Supply-Demand Imbalance

Against the backdrop of supply-demand imbalances, copper prices may strengthen throughout the year.

Compared to the rapidly growing industrial demand, the growth in copper supply is not significant. Global copper mine production has fluctuated little in recent years, with a compound annual growth rate (CAGR) of 2.4% from 2002 to 2022, and copper inventories remain low.

At the end of last year, as many as 600,000 tons of planned copper production globally vanished, intensifying concerns about a copper deficit. The International Copper Study Group (ICSG) pointed out in its February report that the refined copper market faced a shortage of 87,000 tons from January to December 2023, indicating that the global supply-demand situation remains in a state of tight supply.

This is because the construction period of copper mines is relatively long, and there is a time lag of about 3-5 years between capital expenditure and production release. From the perspective of capital expenditure of copper enterprises, the willingness of major global copper enterprises to increase capital expenditure is relatively low. Additionally, the global copper ore grade is showing a downward trend. From 2018 to 2022, the capacity utilization rate of copper mines has been on a downward trend, decreasing from 85.2% to 79.8%.

The incremental development of copper mines can almost only rely on world-class leading enterprises. However, as the major copper supply countries in the world, Chile, the Democratic Republic of the Congo, and Peru, together account for nearly half of the total production, but they are currently facing their own problems.

The Democratic Republic of the Congo has been constrained by a lack of electricity, which has been limiting the country's expansion of copper production. China Minmetals Corporation's large copper mines in Peru may be affected by protest activities and could face production halts. Chile, which has experienced declining production and project overspending eroding its finances, is also seeking the recovery of its national copper company, Codelco.

In addition, the expected resumption of production at the Cobré Panama copper mine is unlikely, and an export ban on Indonesian copper concentrates will take effect in June. Russia, as one of the three major refined copper export countries, accounts for approximately 4% of the global production and is also an important source of copper stocks for the London Metal Exchange. Recently, it has also been subject to trading restrictions.

On April 13, the United States and the United Kingdom announced a ban on the London Metal Exchange and the Chicago Mercantile Exchange from accepting new production of metals (aluminum, copper, and nickel) from Russia. The U.S. Office of Foreign Assets Control also issued Executive Order 14068, prohibiting the import of these three metals from Russia.

Although the majority of metals are traded between miners, traders, and manufacturers without the need to enter LME warehouses, the impact of this round of sanctions on Russia's copper sales capacity may be limited. However, the combination of various unfavorable factors undoubtedly exacerbates market concerns about copper supply.

The China Smelters Purchase Team (CSPT) announced after the first quarter general manager's office meeting in 2024 that they will not set the guidance processing fees for spot copper concentrate purchases in the second quarter (as the spot market has become disconnected from the true market fundamentals), but they proposed a joint production cut and suggested a reduction of 5%-10%.

This production cut marks the beginning of the transmission of copper ore scarcity to downstream refined copper industries and countries. The likelihood and certainty of a copper deficit in the medium to long term are relatively high, and the market's expectations for tightening supply are almost unanimous.

The supply-demand structure is the main factor affecting copper prices, with demand dominating in the supply-demand contradiction. However, incidental events on the supply side can have a strong impact on the short-term trend of copper prices. In addition, the trading logic for copper has transitioned from previous interest rate cut expectations to inflation expectations, making it difficult to find any logical flaws in the copper market.

However, there are always risks in investment trading, and long-term strength does not mean there won't be short-term fluctuations.

Who Benefits

Copper-related stocks will also differentiate.

Not everyone will profit from the current rise in copper prices, such as companies that need to purchase copper as raw materials for production. In relative terms, copper mining companies are most likely to directly benefit.

Jiangxi Copper Corporation is the largest comprehensive copper production enterprise in China. It owns the largest Dexing copper mine in China and several other producing copper mines. The annual production of copper concentrate exceeds 200,000 tons, and its Guixi smelting plant is the largest single smelting plant in the world, with the advantage of scale and integrated copper industry chain.

In terms of production, in 2023, the company produced 2.0973 million tons of cathode copper, a year-on-year increase of 14.02%; self-produced copper concentrate containing copper was 202,000 tons, a year-on-year decrease of 1.17%; gold production was 112.64 tons, a year-on-year increase of 26.85%; and copper processed products were 1.8179 million tons, a year-on-year increase of 2.86%, showing significant overall growth.

Jiangxi Copper's self-produced copper concentrate containing copper is around 200,000 tons and is expected to benefit significantly from the rise in copper prices. Although the company faces issues of asset impairment and a decrease in gross profit margin, these are mainly caused by non-copper related businesses.

Tongling Nonferrous Metals Group currently has a copper smelting capacity of 1.7 million tons and refining capacity second only to Jiangxi Copper, ranking second in China and among the top four in the world. The company's domestic copper mine produces around 50,000 tons of copper annually, and in August of last year, it acquired the world's super large copper mine, the Mirador copper mine in Ecuador.

The Mirador copper mine has proven and controlled copper metal reserves of over 6 million tons, with an actual mining grade of 0.6%. It is being developed in two phases, with the first phase currently in full production, producing 121,000 tons of copper annually with a net profit of 1.84 billion yuan. The second phase of the project is expected to start production in the second half of 2025, with an estimated annual copper production of over 140,000 tons.

After reaching full production, the Mirador copper mine is expected to rank among the top 20 copper mines globally, and Tongling Nonferrous Metals Group also has the potential to become one of the top three copper producers among A-share listed companies.

Zijin Mining, which has performed well in both copper and gold businesses, is a star stock in the A-share market in this round of market trends. On April 16th, its stock price hit a historical high, with a total market value exceeding 489.4 billion yuan.

In 2023, Zijin Mining's copper production reached 803,400 tons, a year-on-year increase of 10.47%, and sales volume reached 810,700 tons, a year-on-year increase of 9.75%. At the same time, the company completed the acquisition of a 48.59% stake in the Juno Copper Mine in Tibet, and overseas mines such as the Serbian Peki Copper-Gold Mine and the Bor Copper Mine are expected to gradually reach production in the next two years, with an estimated compound annual growth rate of 10%.

Although the increase in production and prices of main products such as copper and gold contributed to the company's performance growth, rising costs have suppressed the company's profitability. In 2023, Zijin Mining achieved operating income of 293.403 billion yuan, an 8.54% year-on-year increase, and realized a net profit attributable to the parent company of 21.119 billion yuan, a 5.38% year-on-year increase, but with a significant quarter-on-quarter decline in the fourth quarter.

In fact, cost reduction and efficiency improvement remain a headache for mining companies, as the unit costs of almost all global mining companies have been rising in recent years.

Inflation, declining ore grades, increasing mining difficulty, rising costs of labor and power, and other factors have had a significant impact on companies with overseas mines, not to mention the occasional protests, strikes, and demonstrations by local residents, which have brought a lot of uncertainty to mining operations and posed risks to performance and stock prices.

Compared to investors in copper-related stocks, investors in copper futures need to consider taking profits more urgently at present, as the surge in copper prices driven by factors outside the usual fundamentals will not only fuel bullish sentiment but also accelerate selling pressure. The recent increase in trading margins and the adjustment of price limits for futures contracts for gold, silver, copper, and aluminum by the Shanghai Futures Exchange are aimed at warning against risks, curbing excessive speculation, and preventing the formation of price bubbles.

With various parties eagerly anticipating the copper market, regulatory authorities once again play the role of a "speed regulator," which is clearly necessary. However, the profit-driven nature of the business world determines that while slowing down is possible, applying the brakes is difficult.