CEO of CopperBank - Gianni KovacevicBy Gianni Kovacevic
April 24, 2019
Many investors are not aware that ~75% of all the copper that is consumed each year (~24Mts in 2018) goes into components that enable the generation, transfer or utilization of electrical energy. Ok, perhaps you did know that.
However, have you ever considered the relevance of each actual sub-category for the myriad of electrical components? This is an extremely important, under-researched, and totally under-appreciated dynamic for the future of energy. This is the music that is playing for astute energy investors amidst of sea of economic noise.
Some investors highlight that there has been modest demand growth for copper the last couple of years. While true for 2016/2017, that is not the long term average of +3% CAGR since 1900. Who cares about the 120 year average - what about the future?
Substitution is like the Sword of Damocles that hangs over the head of copper miners and fabricators alike.
In the early 2000s, when copper prices climbed from $0.80/lb to $1.50/lb many in the copper business were terrified that aluminium would replace copper for many applications. For fabricators and end users, they did not want to absorb and/or pass-on big price jumps for their products. For copper miners, it is a never ending battle that if society substitutes into aluminium, in almost every case due to price, there would logically be lower demand in the future. Low and behold, society absorbed ~$3.50/lb copper for 15 years from 2005 to present.
The low hanging fruit in the energy space is ultra-high efficiency. If one scrutinizes each individual sub-category where copper is consumed, combined with historical data, definitive conclusions are reached. While sectors like Telecom and Tubing will see "substitution" or "miniaturization" every other category should see the opposite as Government and Industry alike strive for emission-free or ultra high efficient energy solutions.
Reverse substitution is the trend to follow, meaning, monitoring how much more copper will be used in electrical components and the systems that operate them. For example, Turkey is doing a country-wide electrical motor swap (99% of all motors) into IE4 ultra-efficient machines. The payback for this project is 21 months!
Something else to factor into this dynamic. Royal Dutch Shell recently noted that they may very well be the world's largest power producer by 2035. According to Shell, electrification as final energy usage climbs from 19% today, to ~50% in the next 30 years. Do energy investors appreciate the impact this will have on the CAGR growth rate for copper demand? This trend is already underway, however, at this time it is being masked by, amongst other things, lower growth in China. Rest assured, 2 Billion more people will obtain electrification and many things around you will increasingly become efficiently electrified.
As a final note, Rio Tinto recently stated, that to enable any plausible growth in emission-free energy, more copper will be required in the next 25 years than was consumed in the last 500 years. Hint, the grade of the future copper mine is lower than 0.5% and not economic at $3.00/lb!
Meanwhile, today's narrative is a potentially slowing business cycle.
Happy Investing,
Gianni Kovacevic | CEO of CopperBank