This is the perfect set up for one of the price supercycles that have come along every 30 years or so in the commodities world. Years of underinvestment and then a credible demand growth story. It’s what happened after the Second World War, when lack of investment during the depression gave way to soaring demand during the conflict and afterwards as Germany and Japan were rebuilt.
In the 1960s, the catalyst was US president Lyndon Johnson’s Great Society spending splurge, and in the early years of this century it was China’s mass migration from the countryside to its cities.
The demand narrative has several strands. In addition to the copper-hungry renewable energy and electric vehicle sectors, there’s a potential new source of demand from data centres for artificial intelligence. In the US alone, it is estimated that energy requirements for these data centres will double in the next few years.
This could be a big underestimate. Just meeting that demand could add 2pc to global copper demand. And in a tight market, that could quickly push the market into deficit and drive the price higher.
The history of the copper price illustrates how commodity prices tend to move. They do nothing for years, boring investors into submission, and then suddenly take off when the stars are aligned.
In the case of copper, the price was higher in the mid-1970s than it was in 2003. But within three years it had quadrupled. Since then, it has moved sideways for nearly another 20 years, albeit with big swings along the way, and growing numbers of investors think its time may have come again.
As with any commodity, there are different ways to gain an exposure. Only two make sense because you are unlikely to have a big enough warehouse to store the metal itself or to risk the inevitable attempts to relieve you of this valuable commodity.
More likely you will attempt to track the metal price via an exchange traded fund, such as the WisdomTree Copper ETC, which aims to replicate the Bloomberg Copper Index via a basket of futures. Alternatively, you could invest indirectly via an individual miner or a portfolio of these. The purest play would be Antofagasta, but Glencore, Rio Tinto, BHP, Vale, Freeport McMoRan, Teck Resources and, of course, Anglo American all have copper interests. The Blackrock World Mining Trust holds most of these stocks.
Commodities are not a great strategic portfolio holding because in the long run they tend to only match inflation, with lots of volatility. That’s not a great combination. But when the price does move, it tends to go far and fast. Having a small exposure in anticipation of the next big upswing makes sense. There’s a great future in copper.
Tom Stevenson is an investment director at Fidelity International. The views are his own.