Throughout the pandemic, Beijing leveraged strength in the yuan to stockpile metals and grains. Last year, China’s central planners imported more copper than ever before – one-third higher than in 2019. As China continues to build its strategic reserve of key commodities, is a resource war over basic materials such as copper already underway?
Demand for copper is rising this year, as governments use infrastructure spending to create jobs in their pandemic-scarred economies. Copper is one of the most economically sensitive metals because of its ubiquitous use in construction and manufacturing, with its price rising in step with plans to open the fiscal floodgates.
Joe Biden’s $2 trillion (£1.5 trillion) infrastructure package, Europe’s €1 trillion (£852m) Green Deal and Britain’s £600bn Build Back Better plan all guarantee investment in the energy transition will accelerate. But building green-energy infrastructure is not a resource neutral process – it requires a massive amount of concrete, aluminium and iron ore and other materials to construct. But most of all the “Green Revolution” needs copper.
Battery electric vehicles (EV) need almost three times more copper than the internal combustion engine and EV charging points will need a country-wide copper wire network. From renewable-energy grids to wind turbines copper is at the core of making the energy transition work.
Global infrastructure-for-jobs plans means analysts are bullish. “This current price strength is not an irrational aberration, rather we view it as the first leg of a structural bull market,” Goldman Sachs noted, as it forecast new records for the copper price later this year.
Dollar outlook negative
The price of copper has been falling in recent weeks, with a rising dollar bringing an end to its steep rally, but the medium-term outlook for the US dollar is negative. The country’s twin deficits and fact that interest rates will stay low for much, much longer should put downward pressure on the dollar. With demand for the metal also soaring – Europe’s copper consumption is expected to rise 10% this year alone – the fair wind behind prices is likely to continue for as long as the market is in deficit.
As the world’s largest consumer of commodities for decades, Chinese planners understand the global market and play the game especially well. It has been clear since the middle of last year that Western governments would increase infrastructure spending significantly as a job creation scheme once the virus was under control.
As its imports of copper spiked, China joined in the climate-demand boom and set net-zero targets for carbon emissions. Financing and targets are being established ahead of November’s United Nations Climate Conference (COP26) in Glasgow, where commitments to intermediate targets on emissions will be made. With the US now reversing policy under the Biden administration, making environmental goals a key priority, demand for copper looks underpinned for many years ahead.
Beijing’s stockpiling may have been an opportunistic use of strength in its own currency, with the copper price doubling since March 2020 due to Chinese demand. But it also makes long term strategic sense. China’s central planners have a refined understanding of the way commodity markets work and Beijing can be nimble footed in strategic decision making.
US strategic review
The pandemic highlighted the vulnerability of global supply chains in medical supplies and critical pharmaceuticals and has prompted more strategic thinking in the US and elsewhere.
On 24 February, President Biden signed an Executive Order that initiated a year-long review of the systemic risks in the supply chains of multiple high-priority industries. These included energy, agriculture, technology and pharmaceuticals. The executive order indicates that, among other approaches, the Biden administration will explore how trade policies and agreements can be used to strengthen the resilience of US supply chains.
In the mining sector, much of the attention has been given to the importance of rare-earth metals because of the dependence on China and their importance in components that drive new technologies. But the scarcity of basic materials such as copper is also a threat to the drive to modernise western infrastructure to meet COP26 climate commitments and outcompete China in general.
The rising price of copper will inflate the cost of all the infrastructure projects involved in the energy transition. China has been reviewing its supply chains and refining their operations for years, with the US and Europe lagging far behind as China stocks-up on cheap copper and other metals.
The US audit of supply chains could lead to new strategic resources being established. It is certain to result in more state intervention in markets, making markets less free. Grants, subsidies, and new strategic stockpiles are all potential outcomes of the review, with more scrutiny of corporate profits and managed prices chipping away at the US model of governance. It means more tax rises.
The problem with global consensus is that everyone is trying to do the same thing at once, leading to a surge in prices. This can be seen in equity markets, where shares with exposure to the “Green Revolution” are trading at full-to-bursting valuations – and in commodity markets where the bull market in infrastructure-exposed metals may only just be starting.
This new cycle in metals will benefit the FTSE 100, where most of the world’s major listed miners can be found. But it’s bad news for ambitious climate goals, as rising costs and supply-chain crunches are likely make climate targets increasingly difficult to meet. China appears to be one step ahead of the US and Europe once more.
A version of this article appeared in the Daily Telegraph.
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