Citi: Forget lithium, copper is THE bullish energy transition trade

When people think about the energy transition, and the commodities that will fuel it, lithium is usually the first commodity that springs to mind.

Last year, that view was vindicated - as demand massively outstripped supply. And investor dollars followed. Along with coal, lithium quickly became the hot commodity of 2022.   

Yet there's another transition metal looking to have its time in the sun - copper. 

Copper has had a good past 12 months, returning 15.11%, but the spot price has actually fallen 10% in the last six months.

And according to its latest Commodities Outlook, Citi says it's become the leading bullish commodities trade.

A finger in every pie

Copper's investment case rests on the fact it features in virtually every aspect of the energy transition complex. 

It's a critical component in electric vehicles, and solar and wind power generation. 

Investors are locked and loaded

According to Citi, "the most flagged DM recession in history is keeping investors on the sidelines, but the queue is long." 

When this sentiment shifts for the better, expect to see investors pile into copper.

"We see positioning reaching record high levels by 2025, supported by excitement around booming EV penetration rates (owing to dramatic improvements in Chinese battery tech) and booming solar installations."

Base case

Citi's base case sees copper trade between $7,500/t and $8,500/t over the next 6-12 months. 

"We recommend consumers and longer-term investors (i.e., those with wide stops and horizons to 2025) to accumulate copper at or below $8,000/t, as we are very bullish copper medium term, and now see prices rising to average $12k/t (+50% from spot) by 2025, with a bull case of $15k/t in 2025."

The bull scenario, to which Citi assign a 20% probability, sees prices averaging about $8,700/t in 2023, $11,000/t in 2024, and $15,000/t in 2025. But this is contingent on a very soft landing in the US, an accelerated recovery in growth, and increased momentum in decarbonisation.

The bear case, also with a 20% probability, sees prices averaging roughly $8,000/t during 2023, and $7,500/t in 2024 and 2025. This is based on a slower than expected recovery in China due to soft confidence and stubbornly tight credit conditions, a persistent and outsized impact from inflation and elevated rates in the US, and lower than anticipated supply disruptions.