We’re at one of those pivotal moments for the Australian share market: commodity prices have been on a tear, and resource stocks have shot up like a bullet. The S&P/ASX 200 Materials Index is up 10% since 1 January, and up 28% over the past 6 months (as of 26 Jan 2023).
What is an investor to do: buy, sell or stay the course?
Dr. Copper is telling us to stay the course
Source: Gavekal Economics
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With that disclaimer out of the way, it’s interesting to look at copper as a bellwether for commodities generally. Market professionals often talk about “Dr. Copper” because the red metal tends to lead the way for other commodity prices, particularly industrial metals. Its widespread applications in most sectors of the economy – from homes and factories to electronics and power generation and transmission – mean demand for copper is often viewed as a reliable leading indicator of economic health. This demand is reflected in the market price of copper.
So what to make of the 24% rise in copper prices over the last 3 months? Clearly, demand is suddenly outpacing supply. On the demand side, more copper is needed to manufacture electric cars and for upgrades to power grids needed to charge all those cars. A typical battery electric vehicle might require 5x or more copper than a conventional car. It is a critical metal in the transition to a greener economy, and this structural demand is still at an early stage.
But there is also the supply side to the copper story. There has been significant political upheaval and social unrest in Peru, the world’s second-largest copper producer, which supplies 10% of the world’s total production. Political unrest has also emerged in neighbouring Chile, which is the world’s largest producer (27% of global copper production). Furthermore, after years of under-investment and environmental concerns, there are few major large-scale copper producers coming on stream.
Like all forecasts, take this one with a pinch of salt. But it looks like Dr. Copper is telling us that world growth might be stronger than expected, and commodity prices could remain strong.
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