"Just because there's tarnish on the copper, doesn't mean there's not a shine beneath." - Laurence Yep (Dragon's Gate)
The world is evolving. We must be careful not to extrapolate. Yesterday’s winners are sometimes tomorrow’s losers. (Remember Sears, Kodak, Xerox, and Blockbuster?) Green Picks & Shovels Our leaders from Washington to Paris to Beijing want a lower carbon society. They are now determined to drive policy in that direction. Following President Biden’s inauguration, the US has rejoined the Paris Climate Accord, banned drilling on federal lands, and revoked pipeline permits. Many stocks in the electric vehicle (EVs), solar panel, and windmill space are speculative. Nearly all have nosebleed valuations. Some have little revenue, no earnings, and questionable odds of success. Nevertheless, there is a gold rush mentality driving these stocks. Rather than join these speculators, we prefer to sell them the “picks and shovels” – namely the raw materials they will need to build the infrastructure and vehicles in their quest for a lower carbon economy. Demand Rising Electrification requires copper. There is no way around it. We will need a lot more copper to build electric vehicles (EV’s), windmills, and solar panels. It can take up to 3.5x as much copper to build an EV than it does to build an internal combustion engine.* Most major auto manufacturers are announcing capital programs in the tens of billions of dollars to further electrify their fleet. General Motors has committed to go all EV by 2035.
Acerbating this backdrop for copper, we expect growing demand from China as it continues to electrify its economy. China, we fear, appears on path to absorb all available copper supply, leaving little left for the rest of the world. Other emerging markets, such as India, continue to urbanize. Even here in the US, the new Biden administration is advocating for renewed infrastructure investment. Other developed countries are also seeking to upgrade their aged grids after years of neglect and under-investment. Supply Constrained Unfortunately, the supply of copper is limited. It is not easy to bring on a copper mine. It can take five to ten years to find, permit, and develop a new mine. Ironically, some of the regulations imposed in the name of protecting the environment could impede the copper production necessary to transition to a greener economy. For these reasons, there is very little new mine capacity slated to come on line. Goldman Sachs believes we could reach peak copper mine supply within three years. By the end of the decade, this could result in the largest gap between supply and demand in history according to Goldman.** To close that gap, prices could move meaningfully higher to incentivize new supply additions. Not All Worth the Green Copper-related investments are merely one example of opportunities that Fielder is finding amidst the shifting economic and political landscape. There are, of course, other natural resources that benefit from this same “greening” trend. Some we find compelling, others we do not and are actively avoiding. We welcome any contrary or additive thoughts that you have on this subject. You (our smart clients and friends) are our best natural resource! Yours in the Field, Frank Byrd, CFA Steve Korn, CFA
*According to Wood Mackenzie.
**Goldman Sachs Commodities Research, Nicholas Snowdon, "Copper: Charting a Course to $10,000/t", December 1, 2020.
PLEASE NOTE: Copper is a volatile commodity, and as such, the price could drop meaningfully from current levels – even if our thesis is correct longer-term. Our thesis may also prove wrong in the long-term as well. Investing is an exercise in probabilities, not certainties. Accordingly, investing involves risk, including the potential of complete loss of principal amount invested. Fielder offers no guarantees or promises of success. This note is provided solely for educational purposes on a broad asset class. Investing in this asset class may be inappropriate for your particular circumstance. Nothing herein should be construed as a recommendation to buy or sell any securities.
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