No Small Change – A Global Battle to Grow the Copper Economy

IBKR senior market analyst Steven Levine speaks with Mobeen Tahir, associate research director at WisdomTree Europe, about catalysts that have been driving prices for certain commodities – with our focus in this podcast on copper, a critical commodity for use in the ongoing global energy transition.

Summary – Traders’ Insight Radio Ep. 6: No Small Change – A Global Battle to Grow the Copper Economy

The following is a summary of a live audio recording and may contain errors in spelling or grammar.  Although IBKR has edited for clarity no material changes have been made.

Steven  

Hello, and welcome to IBKR Traders’ Insight Radio podcast. I’m Steven Levine, senior market analyst at Interactive Brokers, and your host for today’s program, where we’ll be talking with Mobeen Tahir, associate research director at WisdomTree Europe, about catalysts that have been driving prices for certain commodities, with today’s focus on copper – a critical commodity for use in the ongoing global energy transition.

A little bit about Mobeen…. He works as an investment strategist at WisdomTree, which is an independent sponsor and issuer of exchange-traded products. There, Mobeen takes a holistic view of the investment landscape, identifying both tactical and strategic opportunities for investors.  

These include various megatrends such as the energy transition and their impact across a range of asset classes.  

Happy you could join us, Mobeen.  Thanks very much for taking the time.  

Mobeen  

Steven, thank you so much for having me.  

Steven  

It’s really great. Now, you’ve recently presented a terrific webinar at IBKR on commodities and inflation, and your outlook for copper really caught my attention – mainly, its projected need across the value chain of the energy transition ecosystem – from grid infrastructure and energy storage to electric vehicles and their associated need for a charging infrastructure.  

What struck me were some noticeably large spikes in the projections you provided for 2025, and especially 2030, for the opportunity to use copper in these areas, which I believe came from a recent report from Anglo-Swiss commodity trader and miner Glencore.

Now, I’d like to start off with your insights about how much copper globally would be needed to fulfill the demand for these projections across that value chain.  

Mobeen  

Thank you, Steven.  Sure, that’s a great place to start, and, you know, some people say, ‘copper is the new oil’, and that’s certainly not an unreasonable thing to assert, given how crucial copper is in the energy transition – whether it’s the electrification of transportation, the move towards renewable energy, or the building of energy storage systems – all are very copper intensive applications.  

Now, to give you a sense of the numbers in terms of the growth outlook for copper demand in the coming years: Wood Mackenzie, a specialist researcher in the field of the energy transition and resources – they forecast that over the next 20 years, if the world is to achieve its goals of climate change and contain temperature increases to two degrees Celsius above pre-industrialized levels, copper demand will need to increase by around 3.5% each year for the next 20 years.

So, what that means is that over the next 20 years, overall, demand for primary copper will double from around 20 million tons per annum to somewhere around 40 million tons over the next 20 years.  

So, a significant increase in demand if the world is to meet its climate change objectives.

Now, recognizing that there’s a challenge here, and the challenge is that supply hasn’t really picked up in recent years as it should to meet some of these demand trends going forward; but what that also means is that copper really presents itself as quite a compelling case as a long-term investment opportunity for the same reason.  

Steven  

Yeah, that’s really terrific. And I understand that a few years back, it seems there has been, or there’s reported to have been, an underinvestment in copper mines.  I’m not sure exactly if that’s a result, or a cause, of the effects of copper sulfide on the environment.  Whether it’s drinking water or fish or otherwise. Is there, or has there been more investment in copper mining to meet the amount of global supply that we’d need?

Mobeen  

Yes, Steven, so, certainly, mining — whenever you talk about mining of natural resources, sustainability will inevitably be a topic that comes up. But our view at WisdomTree is that fundamentally what’s held copper investment in terms of mining investment in the last 20 years or so has been a combination of two things: one, of course, price hasn’t necessarily risen significantly enough to incentivize new capital expenditure in the mining sector. And two, which is perhaps a reason in turn of the first reason –  

why hasn’t price increased significantly?  That’s because demand trends haven’t really trended upwards as we now are beginning to foresee.  

So, up until now, copper has primarily been seen as a cyclical asset class, which moves up and down with the economy. So, demand increases when economies are expanding, and then it contracts when the economy starts contracting. Whereas now, suddenly at WisdomTree, we’re beginning to see copper as as a thematic investment opportunity as something that’s aligned with the energy transition megatrend, and this will likely attract new capital expenditure in the mining sector, recognizing that there’s an upward sloping demand trend in the coming years.  

Steven  

Yeah, a lot of increased demand when looking at those projections for 2025, 2030, especially in the webinar you presented. But where would all this copper come from, or where does it come from?  

Are there specific countries or areas in the world that this copper is generally sourced?

Mobeen  

Sure, if we look at the top producers of copper, we have Chile as the biggest producer in terms of the actual production, but also in terms of the total reserves. So, remember when we talk about reserves, these are deposits that have been discovered, evaluated, and assessed to be profitable, but they aren’t necessarily being used in active mining, so they are there to be tapped into.  

So, Chile holds that the number one rank in terms of the top producer, as well as the country with the most known reserves, but other countries are Peru, certainly number two on that list.  And in fact, it was supply disruptions from these two countries during the COVID pandemic, which resulted in a lot of the price appreciation over 2020 and 2021.  And it really emphasizes the importance of these two countries in the landscape.

But there are other key countries as well, of course China, Congo and US are in the top five in terms of top producers. Some of those countries are punching above their weight, because they’re not necessarily in the top five in terms of reserves, but they’re producing more than more than they have.  

Steven  

Yeah, that’s really interesting.  Are we seeing more exploration in these countries to meet the demand, or the coming demand?  

Mobeen  

Yeah, I think even though we are seeing exploration in these countries, I think the general consensus in the industry is we need to see a lot more.  

So, you mentioned the topic about … the question about how much investment do we need to make in mining?  

Now, certain estimates … analysts expect that mining capital expenditure needs to be somewhere around USD 1.7 trillion over the next 15 to 20 years. Now, this compares to just around USD 600 billion of capital expenditure in copper mining that took place in the previous 15 years. So, just summarizing those numbers, capital expenditure needs to go up by 2-3-times in the next 15 to 20 years compared to the last 15 to 20 years – just a ballpark to get a sense of where we are. 

Steven  

That’s a huge increase in in the amounts of investment.  That’s a rather large spike, it’s interesting.  

I guess that just speaks to the breadth of the global energy transition, and beyond that, how much is going to be needed for other things that would require copper as well.  I suppose consumer products or things of that nature.

It’s really funny, I believe it was in 1943 that copper pennies, or the composition of the material of copper pennies was replaced with, I think, zinc-plated steel, so that they could use that copper for the war effort – at that time, World War II. And I wonder if there might be this opportunity to start seeing what is traditionally made of copper, and a phasing out of those types of materials, for use in the energy transition. 

Mobeen  

Yeah, I love that anecdote, Steven.  Very nice.  You’re absolutely right, copper is something that’s been used in currency for decades. It’s still used in currency, various coins, et cetera.  Even if some of that changes, copper will probably remain so unless we go completely digital. I hate carrying coins in my wallet, but there you go.  

 But you’re absolutely right. I think what your question also touches on is the reconfiguration of where the physical copper sits and how that can be recycled into other applications.

Now currently, if we look at recycling of copper: recycled copper accounts for around 1/3 of total copper supply in the world, according to the International Copper Association. This is pretty significant, but it could improve even more, because fortunately for copper, copper is 100% recyclable. You can recycle

it as many times as you want, and it doesn’t lose its physical properties. So, it will still be good enough for an EV [electric vehicle] battery if it’s been recycled 15 times.  

Steven  

So, another great opportunity in the value chain of the ecosystem, I suppose, would be recycling efforts?  

Mobeen  

Absolutely, and I think it’s going to be an area, which attracts a lot of investment, especially if new mining supply is unable to meet the demand growth that we are going to see in the coming years.  

We might see the emphasis on recycling growing even more, and we know that the recycling industry is getting better at recycling not just things like coins, but even recycling EV batteries. So, if something as sophisticated as a lithium-ion battery that goes into a car can be brought down back into the core metals and then reused again for various applications, then certainly this sort of industry will enable that that growth.  

Steven  

Well, this speaks a lot to the supply and demand equation for copper as the projections you’ve stated, or meted out, in the webinar to 2025 and 2030, to meet those expectations. So, I suppose that copper stands to increase in value as we get closer to those times, and the more demand that there is for it.

How expensive do you think copper can become?  I suppose you have to factor in the recycling efforts in terms of the supply part of that equation.  

Mobeen  

Yeah, I think what we might see over the coming years is this new dynamic, where copper prices trend upwards, but still maintain some sort of cyclicality. And that cyclicality might not necessarily come from copper’s alignment with the traditional business cycle for various economies, but that cyclicality may be influenced by capital expenditure cycles, because new capex investment will go in, and of course that will bring in new supply.

When new supply comes online, maybe that cools some of the price pressures that have built up in the market, but ultimately demand will continue to rise.  And then that demand will continue to put upward pressure on prices. So, we may see that cyclicality with an upward trend, and that may be the new dynamic for copper in the next couple of decades – whereas in the previous couple of decades, it was perhaps just cyclicality, without a long-term trend.  

Steven  

Yeah, that makes a lot of sense.  It sounds like I have to save my pennies in that case. That’s really great.  This is really, truly fascinating Mobeen, thank you.  Thank you so much for taking the time to do this.

Listeners out there can learn a lot more about this topic in WisdomTree Europe’s webinar presentation, ‘Commodities and Inflation – A Time-Tested Relationship’ at ibkrwebinars.com, where Mobeen examines a long list of other commodities, including gold, tin, palladium, platinum, and agricultural commodities like wheat, soybeans and coffee. You can also keep abreast of WisdomTree Europe’s market commentary at IBKR Traders’ Insight at tradersinsight.news.

I hope you’ll be back with us again, Mobeen, and we can talk about other commodities as well. I mean, you really described and outlined a great deal of them in that presentation, and I’d love to talk with you more about others.  

Mobeen  

It would be my pleasure to join you again, Steven. Thank you so much.

Steven  

That’s really terrific, thank you, Mobeen.  

And until next time, I’m Steven Levine for Interactive Brokers.