Conviction beyond uncertainty: The investment case for copper
Copper prices have risen sharply in recent months, before pulling back more recently as expectations of higher US interest rates weighed on sentiment and fresh deliveries into exchange warehouses eased market tightness. While copper's long-term fundamental backdrop remains intact, we believe the extended recent move reflects significant distortions created by US trade policy.
Speculation around potential copper tariffs has encouraged a substantial build-up of inventories in the US, with copper accumulated this year equivalent to around 2.7% of global demand. This has reduced the metal available elsewhere, tightening the market beyond what underlying supply and demand fundamentals alone would suggest.
How this plays out in the near term will depend significantly on the US decision on refined copper import tariffs, with both the level and phasing of any tariff likely to matter. Recent news highlighting that no decision has yet been made has contributed to a pullback in copper, with the focus on affordability raising concerns that tariffs may ultimately not be introduced, which would represent the most challenging outcome for copper prices. However, visibility remains limited.
Other factors have contributed to the big move in copper. Speculative positioning has increased, while broader themes such as concerns around currency debasement and AI-related infrastructure investment appear to have supported sentiment.
Interestingly, copper's largest physical buyer, China, does not appear to have been driving the last leg higher. Chinese physical copper premia fell sharply in August, suggesting that buyers have been reluctant to chase the market at higher prices. More recently, however, premia have rebounded as LME copper prices have weakened, which is a constructive signal. With relatively little visible inventory in China, we had questioned how long buyers could remain on the sidelines before returning to the market.
US tariffs create a wide range of near-term outcomes
The key source of uncertainty is what happens to the copper accumulated in the US. If a tariff decision continues to be delayed, inventory could continue to build, prolonging the current tightness in the global market. Conversely, no tariffs would likely be negative for copper prices as some of this inventory could return to the international market. Looking into 2027, we expect the pull of copper into the US to be materially lower than this year, with the possibility of some inventory flowing back into international markets.
The impact of tariffs themselves is more nuanced. Tariffs would likely benefit US copper producers by supporting a domestic price premium. However, if tariffs were implemented immediately and stopped further copper flowing into the US, they could be negative for the broader price by releasing pressure on the market outside the US. This would be more challenging for non-US producers. The ultimate impact therefore depends not simply on whether tariffs are introduced, but on their design, timing and effect on physical trade flows.
The structural case for copper remains intact
These near-term distortions do not change our long-term view. The demand outlook remains robust as copper remains essential to decarbonisation, electrification and industrialisation, meanwhile the supply response remains increasingly constrained.
New projects continue to face longer permitting timelines, environmental approvals, access constraints, community consent requirements, declining resource quality and more volatile weather patterns. Weather continues to become an important supply-side consideration, with El Niño already contributing to disruption in parts of the market, reinforcing the vulnerability of mine production and logistics.
We therefore remain constructive on the long-term copper outlook, with the potential for supply deficits to widen towards the end of the decade. However, dispersion across copper equities remains significant, making stock selection increasingly important. We continue to favour companies that combine high-quality assets, resilient cash flows, disciplined capital allocation and leverage to a structurally tighter copper market, such as Grupo Mexico and Freeport-McMoRan.
More broadly, the Transition Materials strategy provides exposure to a diverse range of materials and underlying demand drivers, allowing us to look beyond individual commodities as valuations and opportunities evolve over time. While legacy commodities such as iron ore played a central role in previous commodity cycles, the strategy focuses on the future profit pools emerging across materials increasingly important to electrification, energy security and other structural growth themes.
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This information is for investment professionals only and should not be relied upon by private investors. The value of investments can go down as well as up and investors may not get back the amount invested. This fund invests in overseas markets and the value of investments can be affected by changes in currency exchange rates. This fund invests in emerging markets which can be more volatile than other more developed markets. This fund has, or is likely to have, high volatility owing to its portfolio composition or portfolio management techniques. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Investors should note that the views expressed may no longer be current and may have already been acted upon. The Key Investor Information Document (KIID) is available in English and can be obtained from our website at www.fidelityinternational.com. The Prospectus may also be obtained from Fidelity. Issued by FIL Pensions Management. Authorised and regulated by the Financial Conduct Authority. GLEMUS6010-1226
