Cu Bull https://www.youtube.com/watch?v=M4du7WnoPoI&t=350s Nick Snowdon GS Metals Strategist
0:00
- Currie said recently that Cu may be in one of the tightest commodity markets we’ve ever seen.
- structurally tight long term because of strong demand and insufficient supply response.
- important strategic commodity that isn’t appreciated at the moment.
- over 3,5,10 years impossibly large supply deficits are developing.
- by middle of decade largest deficit ever in Cu market
- from a starting point of already low inventories, deficits not resolvable at current prices
- impossibly tight market at today’s prices that no fundamental adjustment can alleviate
5:00
- short-term demand weakness due to China Covid lockdown and
- stronger exports out of Russia than expected.
- long-term structural bull market based on 2 key factors
- 1) no decarbonization without copper
- decarb. will create as much of a demand uplift this decade as the China story did in the 2000s
- 2) hit peak Cu supply in next 2 years + absence of new investment
- then supply trends into an open-ended contraction.
- boom in demand from green transition + lack of growth in supply
- 22.5 of 24 million tonne demand this year from non-green
- 1.5 million or %5 green (EVs, charging infrastructure, renewables wind and solar)
- green will double to 3 million by 2025 then again to 6-7 million or %20 of global demand by 2030
10:00
- spectacular EV growth rates in China and Europe
- really aggressive growth in green infrastructure in China and Europe
- it’s no longer theoretical demand
- small part of market but growing at a very rapid rate which will accelerate
- no shortage of Cu in earth’s crust, there are lots of potential mineable projects
- problem is no capital flowing into those projects
- different from previous Cu bull market which started in 2002, almost immediate lockstep supply response
- this time no supply response, not a single copper mine approved in the last couple of years when
Cu has doubled
- No. 1 constraint is the experience of the last cycle, mining industry had a near death experience
in 2013-14 after over-development of supply in response to price rise of mid/late 2000s
- highly conservative mining management mindset after this experience, difficult to erode, still firmly in
place
- less capital flow as mining doesn’t screen well through the ESG filter.
- permitting took 6-12 months 20 years ago, now it takes 2-3 years. Higher ESG standards.
- Chile is one of the most difficult places for permitting, it is the Saudi Arabia of Cu and the length
of time for permits has tripled there.
- Young people aren’t going into mining sector and a shortage of skilled labour is emerging.
15:00
- investors are getting good cash flows from mining companies and they are not demanding production growth.
- In first innings of this lack of supply response.
- Substitution? Cu does not have competitors in its key role as a conductor in the grid and in cars.
- With aluminium you need a lot more of the metal to achieve the same conductivity. Not practical for uses where you have a small amount of space.
- Aluminium has its own lack of investment/supply side problems reflected in recent run-up in price.
- Talent crunch: shortage of skilled labour to drive a supply response just a handful of teams exist who are competent at developing and expanding production. This will limit the pace of new project development.
20:00
- scarce talent will command top dollar.
- Feeds into capital cost escalation and budget overruns. Inputs labour, machinery, fuel all going up.
- cost curve is inflating and for the most expensive mines to operate, it is close to the actual price of Cu.
- over next 12 months a final spurt of growth and then peak production end of 2023 start of 2024.
- small number of new projects in Chile, Peru, Africa then we flatline.
- then an open-ended phase of supply contraction of ~%1/year from 2025 on. Pretty set in stone.
- price is key to getting a supply response but also key is the realization among policy makers that Cu is key to the green transition and it is going to slow down that transition because there won’t be enough of it.
- Govts. have to make it easier to grow production.
- Today’s price will not move the needle at all in attracting investment.
- Will end users start investing in Cu like car makers buying into nickel and lithium
- Issues that Cu faces are far more extreme than the battery raw materials
25:00
- shortage is not as acute today as in battery metals but in 2-3 years…
- downstream users will start to invest but by then it will be too late
- prices will go absolutely ballistic to the upside and downstream consumers will suffer due to this current intransigence.
- Miners have done a good job of adapting to new ESG standards.
- It is an intensive user of water that is potentially scarce
- Additional costs to pump sea water up into the Andes + longer construction time.
- Drought in Chile the last few years.
- Mining is water intensive, the more you have the higher your throughput.
30:00
- bear case for Cu? A production technology shift like shale oil but no evidence of this just improvements in processing tailings which is marginal. Technical advances in Cu mining like SX-EW are typically slow to be adopted. Nothing like this in sight for the 2020s.
- Mine supply will not solve the problem.
- On demand side there is no substitute, so demand will continue to grow until demand destruction.
- This is why the Cu target is so bullish.
- demand destruction is very hard to achieve with Cu because the cost of the metal to the end user isn’t significant relative to the purchase price of an EV, a device, a home. A massive move in price is needed to achieve demand destruction for these end products. Totally different than oil, gas or agricultural commodities where demand destruction comes quickly.
- Price will go to $15K/tonne because we are already in a very tight market.
- Covid stimulus created large deficits in Cu.
- We start the green supply crunch with very low inventories
- The next leg higher will be a reflection of the progressive green demand eventually removing remaining surplus over the next 3 years
- Then the price has to go to incredibly high levels to achieve that demand destruction.
- In Cu market we’ve never been in such an extreme set of fundamental circumstances.
- We’ve never had to go to end demand destruction to achieve a re-balancing.
- The bull market of the 2000s was resolved by supply response and rapid increase in investment.
- Not happening this time.
- Cu price will have to go well beyond any level we’ve ever seen to get demand destruction.
- $15K could prove conservative.
- Oil went 7-10x in the 2000s to solve imbalances similar to what Cu faces today.
- Can not rule out $50K or $100K Cu
- Commodities such as lithium have achieved that. It happens in commodities when you have extreme
fundamental imbalances and price has to go to such extremes to resolve it.
37:00 End