Weekly Reports | Mar 05 2021

Coppertunities! How to play the red metal as a serious shortage looms in the Biden era

By Tim Boreham, Editor, The New Criterion

While investor interest in ‘battery metals’ has focused on lithium and graphite, copper has been the quiet achiever in terms of its role in the renewable energy revolution.

But with the copper price testing record highs set a decade ago, the credentials of the red metal are getting louder by the day.

For veteran US energy and copper watcher Gianni Kovacevic, investing in copper is a no-brainer given the powerful supply and demand influences. These forces have pushed the price of the red metal beyond $US4.11 a pound, just shy of the record 2011 peak of $US4.63/lb. 

Kovacevic notes that as they transform to low-carbon electrified economies, western countries will become highly dependent on Peru and Chile, which produce 40% of the world’s copper.

US motorists who remember queuing for ‘gas’ during the 1970s Middle Eastern US embargoes will know what dependency means.

In the case of oil, the US responded by not just sucking up to Saudi Arabia, but perfecting shale ‘fracking’ and horizontal drilling that has rendered the gas-guzzling nation at least temporarily oil dependent.

As the proudly contrarian investor Kovacevic tells us, there’s no magic formula to increasing copper production. Despite ample exploration investment during the China commodities super cycle, only low-grade deposits were unearthed.

Assuming 30% of vehicles are EVs by 2030, demand is likely to increase at a compound average of 6 per cent annually. At that clip, the EV market would consume 12 per cent of all primary copper.

One EV contains more than 100 kilograms of copper – about four times that of a conventional vehicle. They also use about two ounces of silver, but that’s a story for another day.

On the “Greta” scenario – a nod to teen Swede activist Great Thunberg – petrol driven engines will be seen only in museums within a couple of decades and copper demand will soar by 15%.

Kovacevic says copper miners face the invidious choice of going four kilometres high in the South American highlands - where oxygen is scarce, let alone water and infrastructure – or the “AK-47” countries such as Bougainville or so many African countries (most listed entities won’t venture there because of heightened ethical investing rules).

It’s no wonder that Citi/Wood Mackenzie research points to a 6m tonne supply deficit by 2030.

Kovacevic adds while copper recycling will play a role in filling demand, it won’t be enough to curtail further sharp price increases. 

Substitution? As the ultimate conducting material, copper can only be replaced with alumina, which is less effective and – ironically – requires a poultice of power to produce.

In the short term broker Cannacord Genuity’s copper watchers expect further short-term strength for three reasons: President Biden’s $US1.9trn stimulus package, supply disruption ahead of Chilean and Peruvian elections on April 11 and the Chinese Lunar New Year.

The latter is relevant because internal travel in China was more subdued this year, which meant that manufacturers maintained production while commodity markets were closed. Hence, they need to re-enter the market to restock.

No doubt at least some of the current trading activity is speculative. Still, it’s hard not to swallow the stronger for longer talk when most major car makers have pledged to banish internal combustion engines altogether (by 2035, in the case of General Motors).

As is the case with most commodities, China is the biggest swing factor. The nation is the biggest copper consumer, but has few mines of its own.

The state-owned utility China State Grid is the single biggest copper buyer in the world, using up to 2.8mtpa. If that’s enough, the agency plans to increase its investment in infrastructure by more than 50% to service its 1.1bn customers.

And did someone mention Joe Biden re-joining the Paris Accord? They should have, given the enormous required investment in wind and solar power.

At the same time, outsourced fabrication is returning to US shores which means making copper – along with America – great again.

As a renewable investment play, copper is an attractive alternative to the obvious channels such as the $US685bn market cap Tesla. If Elon Musk revs up plans to produce 20m vehicles a year, that would account for 1.8m tonnes of copper in the context of current global consumption of 22mt.

ASX coppertunities

In terms of extant copper producers, BHP Group ((BHP)) and Rio Tinto ((RIO)) are by the far the biggest, courtesy of their jointly owned Escondida project.

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