Copper Investment Guide For Indians

Copper is an industrial metal with excellent conductivity, widely used in electrical cables, motor windings, and tubes for air conditioners, refrigerators, and heat exchangers. It is also found in everyday items like cars, televisions, and air conditioning units. Copper is the third most consumed metal globally, after steel and aluminium, and its demand is expected to increase due to the growing use of renewable energy and electric vehicles.

India, a net importer of copper, has a small share of global copper consumption and production. However, with the expected growth in per capita copper consumption, investing in copper in India may be a profitable venture. This can be done through copper futures contracts on Indian commodity exchanges like the Multi-Commodity Exchange (MCX) or by buying stocks of copper mining companies or exchange-traded funds (ETFs) with copper exposure.

Copper futures investing

The biggest advantage of trading copper futures is the leverage. Margins are low, and investors can take significant positions in the metal. However, there is also the risk of large losses if prices move in an unfavourable direction. Copper futures enable end users to hedge against price volatility, and speculators can take advantage of price movements. They are also an option for investors looking to diversify their portfolios.

Copper futures contracts on the MCX are available in lots of 1 metric tonne and 250 kg. The standard contract months are February, April, June, August, and November. The standard lot size for copper futures is one metric ton, and the price in the Indian market reflects the international spot market price based on the USD-INR exchange rate.

Copper ETFs are also available and are a less expensive way for retail investors to invest in copper without the risk of owning the physical commodity. Copper ETFs track the price movement of copper in the international market. Copper is a cyclical metal, meaning its price moves with economic cycles, increasing when the economy is growing.

Copper demand is driven by its use in electrical equipment and infrastructure, as well as renewable energy and green technologies. The growing use of electric vehicles, for example, requires four times more copper than a regular automobile. Copper is also used in charging stations, wind turbines, solar panels, and semiconductor wiring.

When investing in copper futures, it is important to consider the volatility of commodity markets and the various factors that can affect copper prices, such as supply, demand, economic growth, and political developments.

Copper ETFs

There are a few things to keep in mind when considering investing in copper ETFs:

Diversification:

Supply and Demand:

The price of copper is influenced by supply and demand dynamics. Currently, there is a supply crunch due to limited production during the pandemic and years of underinvestment by major miners. At the same time, demand for copper is increasing due to the rebounding economy, the infrastructure plan, and the growing appetite for electric vehicles.

Volatility:

Commodity prices, including copper, tend to be more volatile than traditional stock prices. While the price of copper is unlikely to fall to zero due to its commercial importance, investors should be prepared for potential price fluctuations.

Global Economic Factors:

Copper prices are influenced by global economic factors. Improving economies, such as the US and other parts of the world recovering from the pandemic, can increase the demand for copper. Additionally, economic growth leads to increased demand for copper, while a slowdown will lead to lower demand.

Environmental, Social, and Governance (ESG) Factors:

Mining projects may face challenges due to environmental, social, and governance (ESG) concerns, which can impact the supply of copper. For example, the closure of a plant in India due to environmental and social issues led to a sharp fall in the country's copper production.

• WisdomTree Copper ETF (COPA)
• Global X Copper Miners ETF (COPX)

Copper mining stocks

Copper is a metal with a wide range of applications, from electrical cables to tubes for air conditioners, refrigerators, and heat exchangers. While it often flies under the radar compared to metals like steel and aluminium, it is the third most consumed metal globally.

In India, copper is mined in the states of Rajasthan, Jharkhand, Madhya Pradesh, and Sikkim, accounting for around 2% of world production. The country's per-capita copper consumption is expected to double from 0.50 KG to 1 KG by 2025.

For those interested in investing in copper mining stocks in India, here are some options to consider:

• Hindustan Copper Limited (HCL): HCL is the only vertically integrated copper-producing company in India. It is engaged in various processes, from copper mining to the final stage of converting copper into saleable products. The company has a healthy dividend payout of 30.1% and is almost debt-free.
• Baroda Extrusion Ltd: Baroda Extrusion is another company involved in copper-related activities, although specific details about their operations are scarce.
• Shalimar Wires Industries Ltd: Shalimar Wires Industries Ltd is another Indian company associated with copper, but further information about their business is not readily available.
• Other Potential Options: Other Indian companies with operations linked to copper include Bhagyanagar India Ltd., N D Metal Industries Ltd., Mardia Samyoung Capillary, and Rajnandini Metal Ltd. However, these companies may have diverse business interests beyond copper.

It is important to remember that investing in copper mining stocks comes with risks and volatility. Conduct thorough research and consider consulting a financial advisor before making any investment decisions.

Copper demand and prices

Copper demand is also impacted by the push for renewable energy, such as wind and solar power, which require more copper than traditional energy sources. Additionally, the growing popularity of electric vehicles is expected to increase copper demand, as they use four times more copper than conventional automobiles.

In 2024, London copper prices reached a two-year high, surpassing $10,000 per tonne due to soaring global demand and limited supplies. However, in June 2024, London copper prices dropped to a five-week low due to a strong dollar and weak physical demand, affecting the LME and SHFE markets.

Copper prices are also influenced by sanctions and supply bottlenecks. For example, sanctions on Russia impacted metal markets, and supply bottlenecks in Chile and Peru created challenges in shipping copper globally.

India's copper consumption is expected to increase, with per capita consumption projected to reach 1 KG by 2025, up from 0.50 KG previously. This growing demand, coupled with supply constraints, is anticipated to drive copper prices higher.

Overall, copper demand and prices are subject to various global factors, and investors must carefully consider these dynamics when making investment decisions.

Copper as a hedge against inflation

Copper is a good hedge against inflation due to its wide use in the global economy. In 2022, 46% of the copper produced was used in the building and construction sector, 21% in electronics, 16% in transportation, 10% in consumer goods, and 7% in industrial machinery. As a result, copper's fate is tied closely to general economic growth.

Copper prices tend to rise before general consumer prices, so it can be bought as a proactive inflation hedge. Additionally, since copper is used in many products, its price increases can be passed down into final consumer products, which will then undergo inflationary pressures.

A Bloomberg analysis completed in 2017 shows that for every 1% rise in the consumer price index from 1992, copper prices rose an equivalent of 18%. During the same period of rising consumer prices, copper outperformed all other major asset classes (excluding energy) and rose twice as much as gold.

However, copper's benefits are closely tied to economic growth, and there are risks. During economic downturns, copper is generally the first to be affected. For example, in March 2020, as global COVID-19 lockdowns began, copper prices fell rapidly, just managing to stay above $2 per pound, the lowest level since 2016. During the 2008 recession, copper prices dropped to $1.30.

Another key risk is how world copper consumption is heavily tilted towards China. In 2022, China consumed more than half of the copper produced in the world, with a quarter of that going into its construction industry. Any big changes in the Chinese economy will change the demand and prices for copper.

Despite these risks, there is a growing argument for more secular demand for copper due to the advent of the green economy. Copper is one of the fundamental cornerstones of switching to net-zero-emission commodities because of its excellent conductivity. As countries pursue electrification and other forms of renewable energy, copper demand will increase.

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