AI Needs Copper, and There’s a Shortage.
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AI stocks are still a hot topic of conversation in the investing community, leaving many investors to start seeing all kinds of things as “AI plays”. One “AI play” that most people may not have considered would be copper. While copper is currently seeing soaring prices due to increased demand for clean energy and EVs, it’s also being used in cabling and other critical infrastructure for AI data centers. If this sounds interesting to you, you’ll want to watch this video as we discuss the various ways to invest in copper for retail investors.
AI and AGI
About 3 years ago, we wrote a piece on artificial general intelligence. And we talked about half jokingly how the only limitation will be how fast the biggest semiconductor manufacturer in the world NVIDIA can churn out GPUs.
And the joke was that AGI would be smart enough to funnel all the resources and investment money into their sole supplier or primary, by far, supplier of GPUs and everyone would benefit from that and NVIDIA would become the biggest company in the world. Well, we’re not far away from that happening, interestingly enough.
What AGI Needs
So what does AI or AGI need in order to dominate the world? What it needs really are data centers, GPUs, big data, and electricity.
And that led us to produce this video on electric dividends that was off the back of a comment that Mr. Musk made about how electricity is going to be the new oil for AI. He had suggested investing in Transformers, “probably where things are headed from the standpoint of AI, a voltage Transformer shortage in about a year,” and we took a broader look at Electric utilities.
Now the price of copper has soared without a doubt and just last month copper reached an all-time high of $5.20 a pound.
That’s according to Trading Economics. And the basic thesis for copper goes something like this: The demand for electricity will increase, again Musk proposed Transformers as a way to play this, electricity utilities may stand to benefit.
It seems like a good time to invest based on the coming decline in rates. So utility stocks tend to rise when interest rates fall because of their higher dividend yields relative to the market. Now electrical uses of copper account for about 3/4 of total copper use. So copper is a play on the electrification of the economy.
Copper Demand Soars
But there’s another problem that’s lurking in the shadows, that is, copper’s biggest mystery is finally cracking, says Bloomberg, the warnings keep getting louder the world is hurdling towards a desperate shortage of copper.
Humans have been using copper for 10,000 years now and deposits are drying up and the type of breakthrough technologies that have transformed other Commodities have failed to materialize for copper but this piece goes on to talk about this startup called Jetti and how their technology is enabling the production of copper from lowgrade ores that contain 70% of the world’s remaining copper resources. It’s called Leaching and it uses the power of a microbial system that’s existed for billions of years.
So when we take a more holistic look at Copper, it’s the third most widely used metal in the world and this breakdown by Global X shows us sector end uses.
Asia accounts for 74% of the world’s copper us,e did in 2020 those numbers probably aren’t far off from what they were then, and here’s why: China accounts for 50% of the world’s copper demand that’s driven by their heavy investment in infrastructure. So Global copper demand is highly correlated with global economic activity.
Another important driver of copper is the US homebuilding industry which is expected to benefit from the American Infrastructure and Job Act. Interestingly enough, in some parts of the United States, Detroit being one, houses that are left unattended oftentimes are pilfered for the copper that is contained within them. So copper in construction is a formidable amount of what’s used.
Stocks That Benefit From Copper
Now it comes down to Data Centers. This is what the thesis, at least according to Investor’s Business Daily, everybody’s excited about AI.
And this piece here had subscribers in our Discord server asking questions. As AI data centers seen driving demand for copper, these stocks could benefit. They talk about NVIDIA’s pivot to copper cables from optical fiber for data transmission over short distances in AI data centers and Wall Street analysts seem to think that will coincide with a major increase in Copper demand. Interesting point here, a key enabler of using more copper is Liquid Cooling which allows them to cram more GPUs into a single rack.
They say this trend could boost copper stocks. But when you look at the details the impact from AI data centers is rather minimal. So JP Morgan says they expect 2.6 million tons of new copper demand by 2030 attributed to Data Centers. That’s about, at that time, will translate to about 2% of expected Global copper demand. So that’s not a whole lot. At that time it’s expected, as we mentioned earlier, that there’s a supply gap of 4 million metric tons by 2030.
And what’s really attributing the demand increase for copper is the growth of battery electric vehicles and renewable energy and, of course, the limited new copper mine supply, it takes a long time, I think 10 years for a new copper mine to come online. So the Man Institute also estimates the build out of data centers to drive up to 1.5% of global copper demand. So AI data centers aren’t what’s driving demand. What’s really driving demand would be electric vehicles.
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Supply and Demand for Copper
So what’s widening the gap between copper supply and demand? Well, there’s the energy transition, right, where we’re moving to renewable energy and energy storage systems; electric vehicles; there’s urbanization, where smart cities and especially in China, everybody moving into urban locations, it’s going to require lots of copper; technological advancements such as 5G IoT, these all rely heavily on copper; and the supply constraints, so more than 50% of copper is produced in Nations that are categorized as unstable or extremely unstable.
So what’s the solution? Well, it’s resource diversification, that would be not being so dependent on certain Geographic locations; recycling is a big component, we’re going to talk about that in a second; and we mention Technology Innovation such as Leaching.
How Copper is Produced
So copper is extracted from two types of ores, you can see here, sulfide ores and oxide ores. And the majority of production occurs in South America where it’s exported across the world.
This diagram here does a good job of showing how 83% of total production comes from refined copper production while 17% comes from recycling, that’s very important.
There are various types of copper, I’ve listed a few here.
You have to wonder really throughout this value chain where all the value gets created for investors and I think gross margins tell this story. But the point, the takeaway here, is that there are various types of copper used for various applications.
Now when it comes to pulling the stuff out of the ground, Chile is responsible for 28% of global copper mine production, more than 50% comes from four countries: Congo China, Peru, and Chile.
This chart here from Visual Capitalist is quite good. It shows how the average copper mining grades in Chile have been on a decline and the idea here is that these failing grades suggest that mining costs are likely to increase making copper production uneconomical.
So as price goes up, the ROI on new projects becomes more attractive and companies are more likely to invest in such projects. Now once copper is pulled from the ground, it’s then refined. And look at this interesting chart.
Where does all the refining happen? Not in the country that’s producing the most copper. It happens in China. 41% of global refined copper production happens in China. That makes sense because China accounts for 50% of the demand. You can see the other countries listed here as well. So this chart shows refined copper production and usage.
You can see, if you look very closely, the Gap there between usage and production implying a shortage and, of course, there’s copper prices listed there. As I said this chart goes to 2019. What this is meant to show is that steadily, increasing demand for copper and the fact that what we’re producing isn’t matching that demand. So what you’re investing in with copper is really a commodity investment.
A Bit on Commodities
So when it comes to the economics of commodity investing, you have a price going up, right, that’s what investors want to see. Well, then, substitutes become more attractive.
Technologies are developed that help you produce more commodity with less effort, as I said, projects start to show a positive ROI and suddenly you have all this supply coming online. Supply goes up, price falls, and that creates problems for miners deciding what to invest in and for what durations and that volatility creates a lot of uncertainty.
Now the exception to a commodity such as copper which is based on global economic health would be gold. So that provides some flight to safety benefits, some diversification effect for when the rest of your portfolio is crapping out.
So for us, investing in any commodity and anticipation of some sort of supply-demand price movement isn’t attractive unless it’s incidental exposure. So ALB is a good example of that, for lithium. You also need to consider that when copper becomes more expensive, companies will innovate so they don’t have to use so much.
This article by Reuters is a good one. It says, innovation in EVs seen denting copper demand growth potential.
So EVs can use as much as 176 lb or 80 kg of copper, that’s four times what’s used in a typical combustion engine vehicle. In a report this week, Goldman said EVs accounted for, this is important, 2/3 of the global demand growth in Copper last year. So that’s where demand is coming from primarily.
And as a response, new EVs from Tesla and the rivals are being engineered for efficiencies in a way that cuts copper content. So they look to improve range, reduce weight, bolster efficiency, that has the cumulative effect of cutting their copper content. Goldman Sachs called innovation in batteries and the potential shift to higher voltage systems like Tesla is the main threat to Copper’s EV demand leverage.
How to Invest in Copper
So for those of you that find this story compelling, how can you invest in Copper?
Well, there are copper futures which are not overly accessible to your average retail investor. There’s physical copper that isn’t, either. But there’s also an ETF and I was surprised to see it’s not being used much.
So you look at popular commodity ETFs for gold and silver and the billions of assets under management, then you have Copper ETF in the millions, $232 million assets under management.
Then there’s miners, so you have BHP 20% of their earnings come from copper. So these larger miners such as BHP, they provide diversification which is good but if you’re looking to invest in Copper then you probably want to invest in a pure play because it’s going to provide you with better exposure.
And we came across this piece by Tom Cunningham, this was back in 2022, but I think it provides a list to start vetting copper mining firms, in particular, he calls these Pure Play.
I checked one Freeport-McMoRan. Indeed, their copper segment is expected to make up 55% of the company’s total revenues for 2024, around $17 billion. That’s their fastest growing segment too, increasing 8% year-over-year.
So I think anything over 50%, you could argue, a majority is about as good as you’re going to get for a pure play but some of these are pure plays, again we haven’t vetted them but OZ Minerals was the one Mr. Cunningham was saying as the best bet. They were acquired by BHP.
And we’ve pointed to some of the larger names here that you’d want to stick with. Really, stay away from the junior mining BS and no exploration resource plays either. They’re just very, very risky.
Conclusion
So to conclude.
EVS are more likely to drive copper demand than AI data centers and Copper’s hitting new highs now and a shortage is looming. So investing in Copper is really a supply-demand commodity play.
This CPER Copper ETF, that’s a simple way to get exposure. And just remember that if you invest in miners, you’re bringing on more risk, especially if you invest in one, company-specific risk. Are you getting sufficient leverage to compensate you for those risks.
So if you learned something in today’s video please be sure to subscribe to our Channel, sign up for our newsletter.
I’m going to leave you with another video that’s quite good. It’s on rare Earths, so these are also set to soar on the back of the electrification economy. So please make sure to sign up to our Channel thanks so much for taking the time to watch this today.
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