How China can help you profit from the copper market

Dear Fellow Retail Investor,

Looking for a surefire market play?

There’s no such thing, of course.

However, a metal the modern world can’t do without offers something pretty darn close.

I’m talking about copper.

China is largely responsible for this opportunity.

Thanks in large part to that country’s massive appetite for copper, the metal’s gone from about 79 cents a pound in 2001 to nearly $5 per pound today.

This bullish trend is likely to continue, thanks again to China.

Historically, the country has used 40% to 50% of the world’s copper ore a year.

And in 2019, China gobbled up 51% of the world’s refined copper.

You can expect China’s appetite for copper to increase in the years ahead

A big reason? The way China stimulates its economy.

When times get tough, China doesn’t rain down helicopter money on the public (like the US did in response to COVID-19).

Instead, it stimulates economic activity through nationwide infrastructure improvements.

Take the 1997 Asian financial crisis and the 2008 global financial crises.

During these turbulent periods, China juiced its economy through massive infrastructural projects.

When I say massive, I mean massive.

These projects tripled the road mileages of the country’s eastern provinces and quadrupled those of its western provinces.

Chinese road expansion was just the beginning.

The country also converted much of its railway system to high-speed rail, and expanded its reach to over 100,000 kilometers.

It also vastly expanded its maritime and airway transport capacity.

Now with COVID-19, China’s ramped up its infrastructure spending yet again.

To that end, in 2020 it issued $565 billion in special bonds.

China’s infrastructure spending spills far beyond the country’s borders

Since 2013, China has been funding a vast collection of infrastructural projects in developing countries that will stretch from East Asia to Europe.

This effort is known as the Belt and Road initiative (BRI).

The estimated cost is a mind-boggling $1 trillion.

You can bet these projects have had – and will continue to have – a significant impact on copper demand.

In fact, research by the International Copper Association found that China’s BRI is likely to increase demand for copper in over 60 Eurasian Countries – to 6.5 million tonnes by 2027.

That’s a 22% increase from 2017 levels.

Obviously, that’s a serious tailwind for copper prices.

Now China is pouring money into “new infrastructure” projects

At the December 2018 Central Economic Work Conference, the Chinese government began to use the term “new infrastructure” to refer to high-tech initiatives.

 These include projects based in 5G, AI, IoT, UHV, and other emerging technologies.

 China’s also pledged to achieve net-zero emissions by 2060 through committing to clean technology and electric vehicles (EVs).

 When you consider how much copper will be needed to bring these initiatives to reality, the odds of the red metal’s prices surging ever higher seems certain…

 

  • China’s growing need for wind power will require about 110 kilo-tonnes of copper through 2018. This demand is expected to worsen a widening copper market deficit of nearly 510 kilo-tonnes by 2027.

 

  • By 2025, there will be an estimated 8.5 million EV sales worldwide, with 54% of those coming from China. Since a fully electric car averages about 80 kilograms (kg) of copper, that means 367 million kg (or 404.55 kilo-tonnes) will go to China just from its EV sales.

 

  • China’s Ministry of Industry and Information Technology says the country will add more than 600,000 5G base stations in 2021 – that’s on top of the 700,000 they’ve already built.

 

All together, “new infrastructure projects” like 5G, AI, and IoT will require 150 kilo-tonnes of copper.

Increased copper demand adds fuel to the bullish case for the metal

There are many other tailwinds for the copper market.

They include political pressure in the U.S. to wean America off fossil fuels…

The European Union’s commitment to eliminate internal combustion transportation in Europe by 2050…

And the Indian government’s efforts to persuade the country’s scooter and motorcycle manufacturers to switch to electric-powered vehicles.

Accomplishing these ambitious plans will require massive amounts of copper.

So what’s the best way for a retail investor to play this development?

You could consider blue-chip mining companies, junior mining companies, and copper-based ETFs.

Here’s another potential play for you – copper and nickel royalty and streaming companies.

These are companies that profit from – but don’t actually mine – these metals (by the way, nickel’s every bit as integral to the EV industry and the Green Revolution as copper is, and they’re often mined together).

Why retail investors should consider copper royalty and streaming companies

Royalty and streaming companies profit by funding mining project development or expansion.

In exchange for this funding, they get a percentage of the mining company’s revenue or a percentage of the metals produced from the mines at a discounted price.

In a royalty agreement – often called an NSR (Net Smelter Return) – the mining company pays the royalty holder a small percentage of the value of production (usually 1-3%).

It could also call for the mining company to pay the royalty holder a small percentage of the operating profit of the mine.

A streaming agreement is when the miner delivers a percentage of the metals produced to the streaming company (typically 5-20%).

Major copper and nickel streaming and royalty companies include Franco-Nevada (NYSE: FNV), Sandstorm Gold Royalties (NYSE: SAND), and Cobalt 27 Capital (CVE: KBLT).

Now please note I am NOT making an investment recommendation for any of these particular companies. I’m just giving you these names as examples.

Having said that, we’re working on an investment recommendation for a junior copper miner that looks worthy of your consideration.

As soon as we’re done with our due diligence, we’ll give you all the details.

Anyway, that’s it for now – thanks for reading.

Until next time,

Doug Fogel
Contributing Editor, Dear Retail

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