The global energy transition away from fossil fuels and toward low carbon sources is accelerating. In 2022, a little more than $1 trillion was plowed into new technologies such as renewable energy, energy storage, carbon capture and storage, electric vehicles, and more.
Not only is this a new annual record amount, but – for the first time ever – it matches what was invested in fossil fuels, according to Bloomberg New Energy Finance (NEF).
A trillion dollars is a lot of money and that smells like an investment opportunity to me. I particularly like the opportunity taking shape in the beaten-down copper mining sector. These companies include: Freeport-McMoran (FCX), BHP Group (BHP) and Southern Copper (SCCO).
Why Copper?
As we seek to electrify everything, from power generation to transportation to heating (heat pumps), copper is the one material that’s used everywhere in the energy transition. Copper has an essential role in electrical wiring, grid infrastructure, wind turbines and electric vehicles, making it indispensable for the energy transition.
On average, electric vehicles use up to four times more copper than regular fossil fuel vehicles and renewable energy systems utilize up to five times the amount of the metal needed for traditional power generation sources. And that last multiple doesn’t take account of the additional copper needed to connect wind and solar power sources to existing energy grids.
Not surprising then that demand for copper is forecast to rise to 40 million tons a year by 2030, up from 25 million tons a year in 2021, according to estimates from S&P Global. And the International Energy Agency (IEA) is largely in agreement, estimating that global copper demand will increase to 33 million tons a year by 2040.
Given that it takes up to a decade to open a producing copper mine, the coming shortfall is inevitable.
However, much of the world’s most accessible, high-grade copper deposits have already been mined. The stark reality was laid out by S&P Global. . .it stated that most of the copper that’s being produced currently comes from assets that were discovered in the 1990s!
There has been a dramatic slowdown in the number of new deposits discovered, as well as the quality of those deposits. Ore reserves at some of the world's largest copper mines are in decline, as production has fallen due to capital-intensive projects designed to move operations from open-pit to underground as the mines age.
Add to this mix labor unrest in places like Peru, which highlight the fragility and risks to global copper supply, only strengthening the long-term bull case for the metal.
Or as the Financial Times' Lex team put it, “a lot of copper comes from very few places.” Almost half of world supply comes from Chile, Peru and China. The number one copper producer – Chile – actually saw production fall in 2022, thanks to water and labor shortages, as well as a tax dispute with the government.
Global copper supply in 2022 suffered a disruption rate — the amount of supply lost versus forecasts — of 6.3%. That was well above the usual average of 4% to 5%, according to the commodity trading firm Trafigura.
According to Statista Research, the dollar value of the global copper market is set to increase by one-third between now and 2030. Separate analysis from both McKinsey and Rystad Energy point to a global supply shortfall of more than 6 million metric tons by the end of the decade. That is equivalent to 20% of anticipated production, or the annual output of Chile, the world’s top producer.
3 Copper Stocks
Now let me circle back to the three copper-producing companies I mentioned.
The world's biggest copper-producing company is Freeport-McMoran (FCX),. However, it garners only a neutral POWR Rating of C. Most of the component grades are Cs. However, it does get a B grade on Quality. Its stock is up over 200% over the past three years, 38% over the last year, but just 1% year-to-date.
The third-largest copper producer is BHP Group (BHP), which earns a POWR Rating of B – Buy. Its Quality grade comes in at an A and its value and stability grades are a solid B. Its stock is up only 13% over the past three years, up 8.5% over the last year, but is also down year-to-date by nearly 8%.
Finally, there is Southern Copper (SCCO), which also gets a POWR Rating of B – Buy. Its highest-graded components are Quality (A) and Stability (B). Its stock is up 75% over the past three years, 38.5% over the last year, and nearly 15% year-to-date.
That gain by Southern Copper year-to-date, in an environment where Wall Street dislikes commodity-related stocks, is impressive. And it is majority-owned (88%) by Grupo Mexico, which has the world's largest copper reserves. That makes it my top pick among the copper powerhouses.
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SCCO shares . Year-to-date, SCCO has gained 26.03%, versus a 17.51% rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.
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