Big tech companies like Nvidia and Microsoft aren’t the only beneficiaries of the artificial intelligence revolution. Once sleepy utility stocks are surging too, and so is copper.
The price of copper, known for its electrical conductivity, hit a record price Tuesday, rising above $5 a pound following a surge of more than 30% this year. Hopes for an economic soft landing in the U.S., the potential for interest-rate cuts by the Federal Reserve that would push the dollar lower, plus signs of a rebound in China, are some of the reasons.
Commodities nerds often refer to the metal as Dr. Copper, the joke being that the price’s correlation with economic growth makes it a vital source of information about the outlook.
But copper may be getting an even bigger boost due to its ties to utilities—mainly because copper wires and power cables are important components for electric companies. Shares of Constellation Energy and NextEra Energy have shot up this year due to expectations that rising demand for energy at data centers will lift their earnings.
The “electrification of everything theme, whether it be the replacement of hydrocarbons as a primary fuel source, or the use of power-hungry cloud computing to run all aspects of our economy and lives” is driving copper higher along with utility stocks, Gavekal Research analyst Tan Kai Xian said in a report Tuesday.
“Until late 2022, the two asset classes ran to different beats, but since ChatGPT’s launch they have moved in lockstep,” he said. And “a fundamental case for this link is the mass adoption of artificial intelligence applications causing a surge in processing power to run them. Such computing needs means more data centers.”
The question for investors is how to play this trend. Some of the utilities now have valuations that are starting to look stretched. They are no longer companies that investors buy because they offer high dividend yields.
Copper miners, however, might still be attractive, even though shares in several of the leaders have run up sharply this year.
Utilities powering data centers aren’t the only positive factor. Analysts at BofA Securities pointed to increased demand for renewable energy and electric vehicles as other “new uses” of copper. “We think that ‘decarbonization means increased metal intensity.’ Quite often, replacing hydrocarbons means electrification = copper,” they wrote on Monday.
The BofA analysts highlighted Buy recommendations on three copper stocks. The analysts like U.K.-based Antofagasta, describing it as a large- cap company that should report strong growth in copper production. A “copper stock with growth is a rare thing,” they said.
The BofA analysts also have Buys on Freeport-McMoRan, which they said has “blue-chip copper exposure,” and Teck Resources, a miner that has sold its coal assets and is now “a new, cheap, copper pure play with growth options.”
As long as more data centers are being built to meet the demand for AI, there will be need for more copper. That means that copper companies could become takeover targets for larger, more diversified metals miners as well.
Credit analysts at J.P. Morgan said in a report that they expect merger activity in mining to increase. “We believe copper assets will continue to be in demand and that companies like Rio Tinto, Barrick, and Glencore could be involved in consolidation,” they said.
Concerns about supplies are significant as well. “It’s not just a story of increasing demand,” said Lewis Black, CEO of tungsten miner Almonty Industries. Tungsten is often used with copper for wiring in data centers.
Black told Barron’s that tougher ESG restrictions have made it more difficult to mine copper, which he said will push prices even higher over the long run. At the same time, he said, demand hasn’t yet returned to pre-Covid levels in the automotive, aerospace, and construction industries. That has given miners less incentive to invest in production, despite the recent pop in demand related to AI, crimping the global copper supply.
There are no signs that the new surge in demand and relative lack of output will abate soon.
“Demand for copper for wind turbines, solar panels, electric vehicles, nuclear power plants, grid upgrades, battery production and power-hungry AI data centers continues to move higher,” said Robert Minter, director of ETF investment strategy at abrdn, the asset manager formerly known as Standard Life Aberdeen, in an email to Barron’s. He said “copper market deficits are predicted for a number of years as mine supply is slow to increase regardless of the price.”
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