Podcast Summary
Copper's Role in Electrification and Reducing Emissions: Despite recent price drops, copper's long-term demand is driven by electrification and reducing emissions, making it a strategic commodity worth investing in for its tight supply and extensive exploration needs.
Copper, a commodity often overshadowed by oil and gas, is experiencing significant demand due to the global push towards electrification and reducing emissions. Principal Asset Management, a real estate manager with a 360-degree perspective, recognizes the potential in this market, despite recent price drops. Copper's long-term dynamics resemble those of oil and gas, with supply tightness and the need for extensive exploration and production. The importance of copper as a strategic commodity for the electrification process makes it a market worth watching, despite current challenges. Listen to the Odd Lots podcast for more insights on this topic.
The copper market is forecasted to have the largest ever deficits by mid and end of this decade: Despite recent price increase, copper market is expected to have significant deficits due to lack of fundamental adjustment and peaking supply from lack of investment
The copper market is expected to experience impossibly large deficits in the coming years, making it an incredibly tight commodity market. According to Goldman Sachs metals researcher Nick Snowden, who will be discussed further in a follow-up podcast, the copper market is forecasted to have the largest ever deficits by the middle and end of this decade. This is due to a lack of fundamental adjustment underway that can meaningfully solve the imbalances at current price levels, despite copper's recent price increase. In the near term, the market is experiencing softening due to Chinese demand weakness from COVID lockdowns and unexpected Russian copper exports. However, these issues are short term and transitory. The structural bull market in copper is driven by the integral role it plays in decarbonization efforts and the demand increase from green technologies. However, copper supply is expected to peak within the next 2 years with a complete absence of fresh investment in the sector, leading to an open-ended contraction. This tension between the demand boom from the green transition and the supply side lack of growth creates a clear tightening in the copper market.
Copper Demand Shifting Towards Green Technologies: Green demand for copper is projected to rise significantly, driven by the EV sector in China and Europe. Copper's abundant supply may face challenges in sourcing and extraction, making it a market to watch for investors.
The demand for copper is shifting significantly towards green technologies, with green demand expected to rise from 5% to nearly 20% of the global demand by 2030. This transition is already underway, with the EV sector, particularly in China and Europe, experiencing rapid growth. The supply of copper, while abundant in the Earth's crust, may face challenges in sourcing and extraction. While there are large mines producing new supply, there are also challenges with scrap metal sourcing and the complexities of the copper supply chain. Overall, the copper market is undergoing a major transformation, driven by the green transition, and investors should be aware of these trends. For more information on how Principal Asset Management can help you navigate this market, visit principalam.com. (Note: Principal Asset Management is a leading real estate manager with expertise in public and private equity and debt, delivering local insights and global expertise. They are actively investing and help businesses take the next step with the American Express Business Gold Card, which offers 4x points on top spending categories.) (Investing involves risk, including possible loss of principal. Principal Asset Management SM is a trade name of Principal Global Investors, LLC. American Express is a third party service provider and is not affiliated with Principal.)
Mining Industry's Slow Response to Copper Price Increase: Despite copper prices doubling, no new mines have been approved due to industry conservatism, stricter regulations, and a skilled labor shortage, leading to underinvestment and higher prices.
The mining industry, specifically copper mining, is facing unique challenges that are preventing a rapid response to the current price increase. Unlike the 2000s, there have been no new copper mines approved in the last two years despite copper prices doubling. This conservatism among mining industry management teams is a result of the industry's experience during the last cycle when overbuilding in response to high prices led to a near-death experience in 2013-2014. Additionally, stricter environmental and social regulations, influenced by ESG considerations, have significantly increased the permitting process length. Young people have also been avoiding the mining sector in favor of tech industries, leading to a skilled labor shortage. These practical, ESG, and conservatism bottlenecks, coupled with investors' focus on high cash returns and lack of demand for growth, mean that the mining sector is in the early stages of responding to the supply shortage for copper. It's a fascinating situation where the industry is learning from the past but also facing new challenges, leading to underinvestment and higher prices without a significant increase in supply.
Copper's superior conductivity makes it the preferred choice despite underinvestment and high prices: Despite underinvestment and high prices, copper's superior conductivity makes it the preferred choice over less conductive alternatives like aluminum, which require more material and are not practical for confined spaces. The talent crunch in extractive industries limits the pace of supply adjustments, further driving up prices.
Copper, despite facing underinvestment and high prices, remains the go-to conductor for various applications due to its superior conductivity. There are alternatives like aluminum, but they require more material to achieve the same level of conductivity and are not practical for confined spaces. The aluminum market is also facing underinvestment and high prices, making it an unattractive substitution choice. The talent crunch in extractive industries further limits the pace of supply adjustments, as there is a shortage of skilled labor to build and grow production at copper mines. This talent shortage can cause further delays in response to the high prices and underinvestment in copper mining.
Copper industry facing peak production and high costs: The copper industry is expected to reach peak production in 2024, leading to a phase of contraction due to high costs. To reverse this trend, higher prices are needed to incentivize new investments. End-users may also secure their supply by striking deals with suppliers.
The mining sector, specifically the copper industry, is facing a significant challenge due to the impending peak in production and the high costs associated with operating existing mines. This situation is further complicated by the fact that copper is a crucial raw material for the green transition, and the current supply may not be sufficient to meet the demand for green technologies. The industry is expected to hit peak production in 2024, after which there will be a phase of contraction. The only way to change this trend is through much higher prices that would incentivize new investments in mining projects. Additionally, end-users may consider securing their own supply by striking deals with suppliers to mitigate potential shortages.
Potential Lithium Shortage and Environmental Concerns: Environmental concerns and additional costs from ESG standards could delay the production of new lithium mines, potentially leading to a supply crunch and catastrophic price increases for downstream consumers.
The potential lithium shortage in the future could lead to significant price increases and negative consequences for downstream consumers. However, investments in new mines are being met with resistance due to environmental concerns and the mining industry's water usage. While the mining sector has been responsive to ESG standards, the additional costs and time required to meet these standards could delay the production of new mines. This could result in a lithium supply crunch and potentially catastrophic price increases. It is crucial for key downstream consumers to push for new mine approvals now to mitigate these risks. Additionally, the mining industry's water usage, while not directly impacting water supply, requires significant investment in desalination plants and pumping seawater to operations. These costs and the ongoing droughts in some regions can impact mining yields and throughput. Despite these challenges, the mining sector has generally adapted well to ESG standards, but the additional costs and time required should be considered when evaluating potential investments.
Significant rewards for businesses with American Express Business Gold Card: Businesses can earn 4x points on top 2 eligible spending categories each month, but demand destruction may be the only way to address copper market deficits.
The American Express Business Gold Card offers significant rewards for businesses, allowing them to earn 4x points on their top 2 eligible spending categories each month, such as transit, US restaurants, and gas stations. However, when it comes to the copper market, there are no clear signs of a production technology shift or a competitive substitute that could significantly impact the market's supply and demand dynamics. Instead, demand destruction could be the only way to meaningfully address the current deficits in the copper market. This is due to the fact that copper is a relatively small component of the cost of most goods that use it, making it difficult to drive demand destruction through copper price increases alone.
Copper Prices: Unprecedented Levels Ahead?: The price of copper, crucial for EV production, could potentially reach unprecedented levels due to the green supply crunch. Prices could even reach $15,000 per ton, but there's a possibility they could go even higher.
The price of copper, which is crucial for EV production, could potentially reach unprecedented levels due to the ongoing green supply crunch. This could be driven by the current tight market, large deficits from COVID fiscal stimulus, and the lack of supply responses to solve the imbalance. Prices could even reach $15,000 per ton, but there's a possibility they could go even higher. This is because commodity markets have seen extreme price increases in the past when facing similar fundamental imbalances. The idea of copper reaching $100,000 per ton might seem far-fetched, but it's not unheard of in commodity markets. The challenge lies in breaking away from the boom-bust cycles and avoiding fiscal conservatism, which can lead to tight markets. The conversation also touched upon the comparison between copper and lithium, with lithium currently trading significantly above its cost curve. Overall, the conversation highlighted the potential for significant price increases in copper and the challenges that come with managing such markets.
Commodity market complexities: Understanding human nature and supply cycles: The commodity market's volatility and shortages stem from long production cycles, human emotions, and end-users' insensitivity. Understanding these factors and addressing talent crunches can bring potential stability.
The current commodity market, particularly in sectors like oil, gas, and lithium, is experiencing unprecedented price volatility and supply shortages. The reasons for this include long production cycles, human nature's fear and greed cycles, and the end-users' insensitivity to price changes for certain commodities. The lack of new groundbreaking projects despite the 2-year commodity bull market highlights the need for potential stability mechanisms, such as OPEC in the oil industry. Moreover, the decisions impacting the market are ultimately made by people, and understanding their motivations is crucial. The mining industry, for instance, is facing a talent crunch, and we need to engage with industry leaders and educational institutions to address this issue. Overall, the commodity market's complexities call for a more nuanced understanding of the underlying factors and their implications.
