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October 2024
Global equity markets reached all-time highs in September after the Federal Reserve cut its policy benchmark, initiating the start of a new easing cycle. Year-to-date, the S&P 500 is up 25.1% (total return in Canadian dollars), while the S&P/TSX rose 17.2%, the MSCI ACWI 21.6%, the MSCI EAFE 15.8%, and the MSCI Emerging Markets 19.7%.
As we explain in detail in our Economic and Capital Markets Outlook, the lagged effects of restrictive monetary policies are leading to a global slowdown, though we ascribe a low risk to a more adverse economic scenario.
Away from the spotlight of market attention, some areas have done quite well. Copper-related stocks, for example, have seen strong performance and we took the opportunity to reduce our exposure. We take this opportunity to take a deeper dive into the mining sector, with a particular focus on copper.
We are optimistic on the medium-term outlook for our mining holdings and are of the view that copper’s role in the global energy transition and electrification of the transportation market underpins the long-term demand for this commodity.
Copper is a critical commodity widely used in the global economy. It is renowned for its superior conductive properties and is essential for the manufacture of electronic devices, infrastructure construction, electrical wiring, and transportation equipment—segments that account for more than 80% of global copper demand. From a geographic perspective, 50-60% of global copper is consumed in China, where it is used in manufacturing, investments in domestic industrial and civil infrastructure, and real estate.
Over the last few years, copper’s role in electrification and the global energy transition has become a key focus of capital markets. In fact, the copper intensity of an electric vehicle (EV) is estimated to be three to four times higher than that of an average internal combustion vehicle. In addition to EV manufacturing, the shift toward green energy is another catalyst driving the global demand for copper. Specifically, solar and wind generation require two to seven times more copper than fossil fuel power generation. As the world moves to cleaner power generation and electrification of transport, copper demand should naturally rise.
More recently, the rapid growth of data centres, due to expanding AI technologies, has required more power. A rise in power demand should mean an increase in copper consumption, as copper is widely used in power distribution networks. However, this potential power demand increase is tempered by continuing efforts to increase the energy efficiency of data centres. In addition, while copper has superior conductive properties, it still competes with aluminum which, despite being an inferior conductor, becomes more attractive than copper at lower price points in certain electrical applications. Currently, aluminum prices are relatively low compared with copper prices, creating a heightened risk of substitution.
When we think about copper demand going forward, we balance the increasing demand related to electrification and energy transition with a continuing slowdown in Chinese economic growth, which impacts half of global copper demand, and aluminum’s substitution effect.
Balancing these opposing demand forces, we expect the copper market to continue to grow at a 2-2.5% annualized rate in the short to medium term.
According to the International Copper Study Group (ICSG), refined copper supply has steadily increased over the last few years, with refined copper production growth showing a notable uptick of 5.9% in the first seven months of 2024—more than double the growth rates experienced in 2020 to 2023. Looking ahead, copper production is expected to increase by 2.8% in 2024 and 2.2% in 2025.
Despite this, overall copper inventories have remained relatively flat in recent years. We estimate that recent demand growth is increasing in line with the historical average of 2.4%-2.5% annually, keeping pace with production growth.
Over the last 10 to 15 years, copper prices were volatile (Chart 1). During the pandemic, the mining industry experienced rapid inflation, and costs at some mining sites increased by 30% to 70%. At the same time, companies observed substantial increases in capital expenditures required to bring new projects on-line. A combination of high operating costs and capital expenditure inflation on the supply side and continuing demand growth resulted in the price of copper remaining at close to historical highs.
Going forward, we expect copper demand to continue to grow and the price of the commodity to remain at levels that allow companies to earn a sufficient return on capital on new projects necessary to satisfy the growing demand.
As mining is a cyclical industry, we have carefully adjusted our exposure to select companies as opportunities presented themselves. For example, we increased our exposure to Teck Resources in 2015 and 2020, and to HudBay Minerals as their share prices and valuations fell to multi-year lows.
Share prices of copper producers have increased sharply, reflecting the market’s enthusiasm for the metal playing an important role in electrification and energy transition. For instance, Teck Resources currently trades at a 2025 price-to-earnings multiple of 27 times1. We believe that the current valuation of certain companies reflects a very optimistic outlook for future copper demand. A more conservative scenario could limit the return potential for mining stocks. Consequently, we have recently reduced our exposure to Teck Resources, HudBay Minerals, Lundin Mining, and Ivanhoe Mines.
We continue to be invested in a select group of mining companies, though with reduced positions, as we recognize their potential as high-quality, low-cost producers capable of delivering sustained long-term value. While we have prudently managed near-term valuation risks, reflecting our disciplined approach to price sensitivity, our medium-term outlook for copper remains optimistic, and we are well-prepared to increase our exposure if prices adjust in the future. As long-term demand may strengthen beyond current projections and supply is likely to remain constrained in the short-term, we see an increased likelihood of commodity prices surpassing existing long-term forecasts. In this environment, we believe our mining holdings are well-positioned to outperform prevailing expectations.
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