Is Copper the New Oil?

Today, I will introduce investment theme no. 4 (of 11). The first three were about:

#1:? uranium (article);

#2:? water (article); and

#3:? AI (video).

The choice to deliver #3 as a video was really a test; to see if that medium had a different impact, and I am pleased to say that it seems to have worked out well. The video on AI has been watched by over 1,700 people so far and, although you never know whether it was the medium (video rather than article) or the topic (in this case, AI) that drew in the masses, it clearly worked. That said, I would appreciate any feedback you can provide as to your preferences. You can always find me on [email protected].

Back to this month’s topic. We used to call it the Green Metals basket but changed the name to Green Materials when we researched rare earths (not a metal) with a view to add it later. Copper is obviously not the only Green Material in this basket, but I will focus on it today, as there is an awful lot going on there right now.

Copper is arguably the most important metal in the world. It is used extensively in the construction industry, by producers of electronic products, when manufacturing transportation vehicles (everything from cars to ships and planes), and it is also widely used in the industrial machinery and equipment industry. And the green transition hasn’t lessened our reliance on copper. Take for example EVs; the average EV uses about four times more copper than the average petrol/diesel car.

Much investor attention has been allocated to lithium more recently, but I would argue that copper is more important than lithium. Both are indispensable in the green transition, but copper is a far more important metal to the overall economy than lithium is. Therefore, I tend to agree with those who argue that the country which produces the most copper could end up becoming the Saudi Arabia of the future, and that country is Chile. And the fact that Chile is a massive producer of both copper and lithium doesn’t exactly weaken the argument.

Copper is one of the hottest topics right now. The copper price is very strong, investors have fallen in love with it (which is always dangerous),? and the steep backwardation of the futures curve (meaning that front-month futures trade at a large premium to more distant futures) on COMEX in New York suggests some sort of supply stress. At this juncture, I should point out that, commercially, copper is traded on three exchanges worldwide – on COMEX in New York, on LME in London and on SHFE in Shanghai – and the three forward curves are not always identical, i.e. local conditions may affect one but not the other markets. Take for example COMEX vs. LME right now. Whereas the forward curve on COMEX is backwardated right from the front-month, the forward curve on LME is actually in contango until late 2025, following which is also goes into backwardation. This is quite possibly an indication that the near-term supply stress is specific to New York.

Worldwide, copper production is actually down year-to-date, partially due to various disruptions more recently and partially due to a lack of investments industry-wide. Unless those investments are scaled up massively over the next few years – one estimate suggests at least $150 billion must be invested over the next eight years to eliminate the deficit – it will continue to get bigger and bigger. According to my source (Goldman Sachs), this year, demand is expected to outstrip supply by approx. 400,000 tonnes, and the mining shortfall can only come from inventories. Next year, the shortfall is expected to approach 500,000 tonnes and, in 2026, the deficit is expected to be at least 550,000 tonnes – all due to a lack of investments in the industry.

In fact, inventories are now so heavily drawn upon to meet demand that the copper research team at Goldman Sachs believe we face a complete stockout risk later this year. Should that happen, you don’t need an A+ in market psychology to figure out what will happen to the copper price.

The counterargument to the bull case is the standard one – that commodities always are subject to big swings between optimism and pessimism, and that the industry’s appetite for new investments is a reflection of where on the curve company executives are. That said, with the green transition upon us and with recessionary conditions looking less and less likely (for now), why are they not going all in?

For weeks, I have been looking for an answer to that question and have settled on the following explanation: Although the backwardated forward curve is not necessarily, in itself, a reflection of the long-term views of industry insiders, the seemingly low appetite to invest in exploration probably is. And it is the low amount invested in exploration that has caused the ongoing supply stress which explains the backwardation of the futures curve. In other words, the question we need to ask ourselves is – why is the appetite to invest in exploration projects so low? I have identified three possible reasons – maybe a combination of all three.

Firstly, copper exploration has remained remarkably unchanged over the last 150+ years. Geologists go and look for rock and soil alterations that suggest a deposit may be nearby – a methodology that only works near the surface. Geologists are typically unable to see anything deeper than 200 meters below the surface. Having said that, a new exploration technology called Typhoon (developed by Ivanhoe Electric) has been developed. With that, geologists can, for the first time, get an image of deposits several thousand meters below the surface. Should copper mining companies begin to use this new technology more widely, copper supplies could rise significantly.

Secondly, copper is the most cost-effective, conductive metal worldwide, hence why it is used everywhere; however, a new material – graphene – is on the horizon, and graphene is far more conductive than copper (almost by a factor six on a density-adjusted basis) but still too expensive to produce; however, that will change over the next ten years. A commercial rollout of graphene will reduce demand for copper.

Thirdly, copper mining company executives are under massive pressure from institutional investors to reduce the environmental impact of copper mining which is admittedly significant. However, I would argue that the green transition is not going to happen without copper and am of the opinion that you can’t have your cake and eat it, but that is obviously not a view taken by everyone.

The introduction of Typhoon and/or graphene could upset the delicate balance between supply and demand. At this stage, it is impossible to quantify those two risks, but they are both meaningful, and industry insiders will be aware and will take them both into consideration when planning for the future.

In terms of time horizon, while the use of graphene is still years away, Typhoon is not. It is actually already being used in other industries – you can read more about it here. As far as graphene is concerned, given that it is one of our 11 investment themes, I have decided to make that my topic next month. Unless you tell me otherwise, I plan to do it on video.

See you then.

Niels