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Commodities

Copper and silver prices spike as governments decarbonize

Beijing's public works plans and global efforts to go green spur trading

Copper foils for lithium batteries are produced at a factory in Tongling, China.   © Reuters

TOKYO -- Money is flowing into the markets for such materials as copper, silver and aluminum on growing demand thanks to a shift to renewable energy and electric cars.

The trend was triggered by solid demand in China, which brought the COVID-19 pandemic under control ahead of other countries. Now investors around the world are trying to get ahead of the curve on the so-called green cycle poised to lift the commodity markets over the long term.

Three-month copper futures on the London Metal Exchange, the global benchmark, hit a seven-year high earlier this month. With the price at $7,984.50 per ton as of Friday, copper futures have risen about 80% from a low in March when the coronavirus was wreaking havoc in China.

Ever since the spread of infections settled down there, the Chinese government has been propping up the economy through public works investment and other steps. "In China, there is a shortage of many industrial products, and this is spreading to materials," said Naohiro Niimura, a partner at Japanese commodities consultancy Market Risk Advisory.

China's monthly imports of copper ingots and related products are well above year-earlier levels in volume terms. Meanwhile, many mines in South America and elsewhere have been forced to cut output due to COVID-19 infections.

Investors increased buying sharply after seeing this change in the supply-demand balance. Net buying by investment funds on the LME grew to a record high since the calculation method changed in 2018.

Another factor behind this inflow into metals markets is the decarbonization efforts by governments around the world through reduced consumption of fossil fuels.

A car that runs on gasoline includes 15-25 kg of copper, more than before due to the increased use of electronics. But an electric vehicle contains roughly 80 kg of copper. Furthermore, copper is essential in infrastructure for boosting the use of renewable energy.

"In the stock market, the S&P Global Clean Energy Index, which is comprised of companies involved in renewable energy, has tripled from the spring low," said Hiroyuki Takai of the European Energy Exchange's Japan Power Team. "Similar investment money is starting to flow into commodities markets."

Niimura believes that Chinese demand is behind soaring copper prices, not the so-called Biden trade of snapping of green products in anticipation of the environmental policies of U.S. President-elect Joe Biden. Still, "there is no doubt that metals that will enjoy stronger demand due to the proliferation of renewable energy and EVs will be a major theme in commodities markets for the next decade or two," he argued.

Prices of silver, which is used in solar cells, started to climb around July when Biden announced policies putting weight on the environment. The gold-silver ratio has come down from an all-time high of more than 120 this spring to around 70 recently due to silver's rise and a correction in the gold market.

Other green commodities include aluminum, whose demand is projected to grow for use in power infrastructure and as a lightweight material for automobiles; platinum, used in the catalysts of fuel cell vehicles; lead for batteries that store electricity generated from solar and wind power; and nickel, which is used in automotive batteries.

The inflow into commodities markets can partly be explained by investors looking for somewhere to put money whose supply has grown as monetary policy is loosened to deal with the coronavirus. Whether demand for green commodities really grows is yet to be seen, but investors seem to have sensed a new trend.

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