Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wis and I'm Tracy Halloway. Tracy, I feel
Speaker 1: like a lot of our best episodes are often based
Speaker 1: on something in a previous episode and we're like, hello,
Speaker 1: that sounds interesting, Like, you know, we did the dredging
Speaker 1: episode because of something that we learned about when we
Speaker 1: were talking about why your luggage was stuck or why
Speaker 1: your goods were stuck. Yes, that's exactly right. And this
Speaker 1: is a similar episode, isn't it. We heard something interesting, uh,
Speaker 1: and it came from the commodity space, and we've decided
Speaker 1: that we need to dig in a bit further. Right, So,
Speaker 1: earlier in the year, a couple of months ago, I
Speaker 1: recall we were having a chat with Jeff Curry, who
Speaker 1: is the top commodity strategist at Goldman Sachs, and of course,
Speaker 1: the the overall topic was just like this tremendous come
Speaker 1: addity inflation that has been like the story of much
Speaker 1: of one and and a lot of the focus has
Speaker 1: been oil, and a lot of the focus have been food.
Speaker 1: But then he also said that copper specifically might be
Speaker 1: one of the tightest commodity markets that we've ever seen
Speaker 1: in history. Yeah, which is kind of surprising because I mean, A,
Speaker 1: you just don't hear copper talked about as much as
Speaker 1: something like oil and gas. But b if you look
Speaker 1: at the price chart of copper, it's been coming down
Speaker 1: in recent months, mostly because of you know, concerns over
Speaker 1: China's economic growth and the lockdown and things like that.
Speaker 1: But it's not necessarily a market that is screaming uh
Speaker 1: structural under investment and supply tightness, right, I think there's
Speaker 1: sort of like this long term store because the increases
Speaker 1: in demand for copper are expected to be very high.
Speaker 1: Unlike oil, it takes a really long time to get
Speaker 1: new production online. It's not like you just like put
Speaker 1: a new rig out somewhere in Texas and the Dakotas
Speaker 1: and start pumping. So it's a there's a lot of
Speaker 1: demand for copper, and although the prices are done recently,
Speaker 1: it's still up a lot since this crisis overall, so
Speaker 1: it's still like a tight thing. But I think structurally,
Speaker 1: long term, apparently it seems like it's going to be
Speaker 1: a tough market. Well, this is what I'm trying to
Speaker 1: get it, perhaps inelegantly, but it's it's it's. Copper is
Speaker 1: something that we don't talk about that much, but if
Speaker 1: you look at it, if you look at the long
Speaker 1: term dynamics, it seems to have some resemblance to what
Speaker 1: we've seen with oil and gas. So big booms and
Speaker 1: bus that kind of lead to uh, structural under investment
Speaker 1: or under exploration and unwillingness to expand minds also because
Speaker 1: of environmental concerns. And then the reason that's so interesting
Speaker 1: is because if you look at what's going on with
Speaker 1: the attempts to electrify everything, attempts to bring down emissions
Speaker 1: and things like that, well you're going to need electric
Speaker 1: wires for that, and so copper becomes a really important
Speaker 1: street teach, a commodity that is nevertheless kind of underlooked
Speaker 1: at the moment. Yeah, totally. So the line that Jeff
Speaker 1: used in our podcast, he said, I would argue copper
Speaker 1: is likely to be the tightest commodity will have ever seen.
Speaker 1: It's much tighter than what oil was during the two thousand.
Speaker 1: Let me remind you oil went up seven x in
Speaker 1: the two thousands. Our forecast of sifteen thousand of time
Speaker 1: on copper. But no matter what technology you use, you're
Speaker 1: gonna be using electric electricity. And the only thing that
Speaker 1: can conduct electricity, given the rules around the periodic table
Speaker 1: and the rules of chemistry, is copper at the rate
Speaker 1: we need to conduct it. So it's all right, we
Speaker 1: gotta follow up. And so we are going to follow
Speaker 1: up on copper with a fellow, a colleague of Jeff's,
Speaker 1: a Goldman Sacks. We're going to be talking to Nick Snowdon,
Speaker 1: who runs metals research at Golden Goldman Sacks, and whill
Speaker 1: explain that line and what we should be watching for
Speaker 1: with copper. So, Nick, thank you so much for coming
Speaker 1: on odd lots to be on with you both. What
Speaker 1: does that mean what we talk about a tight commodity market?
Speaker 1: How do how do you define that? Well? I mean,
Speaker 1: I think when we look at the outlook for for
Speaker 1: the copper market, um, you know, over the course of
Speaker 1: the next three, five, ten years, what we see are
Speaker 1: essentially impossibly large deficits developing over that that timeframe. But
Speaker 1: by the middle of this decade we're forecasting the largest
Speaker 1: ever deficit in the copper market. So just two years
Speaker 1: away from now, um and by the end of the
Speaker 1: decade that the largest ever long term deficits. So I
Speaker 1: think you know what that's telling us relative to to
Speaker 1: the starting point already of very low inventories, is that
Speaker 1: this market has such severe imbalances that you know, they're
Speaker 1: not resolvable at at current price levels. Um And. I
Speaker 1: think that's the kind of crux of the issue in
Speaker 1: the copper market. Um it's just an impossibly tight future
Speaker 1: at today's price that there's no fundamental adjustment underway that
Speaker 1: that can meaningfully solve what what lies ahead. So can
Speaker 1: you dig into that a little bit further, because you know,
Speaker 1: I mentioned the price action in copper recently. It is
Speaker 1: up a lot over the past year or two, but
Speaker 1: it has been coming down, and so I guess my
Speaker 1: question is what is it that you guys are seeing
Speaker 1: that the market isn't currently seeing and what is responsible
Speaker 1: for the looming supply imbalance that you just mentioned. Yeah, sure,
Speaker 1: I mean I think there's there's a kind of a
Speaker 1: horizon difference there. Um. I think in in the near term,
Speaker 1: commodity markets are ultimately driven by by spot fundamentals, um And.
Speaker 1: And you know, in the in the current kind of environment,
Speaker 1: we are seeing a weakness in in Chinese demand due
Speaker 1: to the due to the COVID lockdowns. That has generated
Speaker 1: some softening a act on on the market. On top
Speaker 1: of that, we are seeing slightly stronger exports of copper
Speaker 1: out of Russia than was expected um when you went
Speaker 1: back to to to the beginning of the invasion. So
Speaker 1: that's creating a bit of softness in the market and
Speaker 1: that has certainly weighed on price. But you know, those
Speaker 1: are short term transitory issues in the copper market. When
Speaker 1: we talk about the structural ball market copper, that's underpinned
Speaker 1: ultimately by by two key factors. One, UM, you know,
Speaker 1: there's essentially no decoganization without copper. It's a you know,
Speaker 1: absolutely integral raw material for for for for the key
Speaker 1: green technologies e VS. EV charging, infrastructure renewables UM. And
Speaker 1: I think you know, we see the demand impact from
Speaker 1: decorganization efforts over the course of this decade generating as
Speaker 1: much of an uplift of copper demand as China did
Speaker 1: in the two thousand UM. So it absolutely meant UM.
Speaker 1: But at the same time, that's coming up against an
Speaker 1: environment where we hit peak copper supply within the next
Speaker 1: two years and there's a complete absence of fresh investment
Speaker 1: coming into the sector. And so after that peak supply
Speaker 1: is and is trending into an open ended contraction. So
Speaker 1: you have this clear tightening tension between this boom in
Speaker 1: demand tied to the green transition and really a complete
Speaker 1: lack of growth coming from from the supply side. Let's
Speaker 1: talk more about the demand side. So in right now,
Speaker 1: how many tons of copper does the world use I
Speaker 1: don't know in a day or a year or whatever
Speaker 1: however you like to make it. And what is the
Speaker 1: sort of industry or usage breakdown? And then what do
Speaker 1: you see as a that number the total volume demanded
Speaker 1: in the year twenty thirty and what will be the
Speaker 1: segmentation of where that demand is coming from? Yeah? Sure,
Speaker 1: so I mean if you look at the global copp
Speaker 1: market today, demand in two will will come in at
Speaker 1: around twenty four million tons. So yeah, the way we
Speaker 1: look at that that demand breakdown, I think this is
Speaker 1: the you know, in the context of the placing the
Speaker 1: green transition is green versus non green demand. UM. Today
Speaker 1: the world is dominated by non green demand. UM. That's
Speaker 1: copper going into construction, wiring in your house, UM, wiring
Speaker 1: in in UM electronics, in cars, UM, in the grid.
Speaker 1: UM that out of that twenty four million tons this
Speaker 1: year will will make up about twenty two and a
Speaker 1: half a million tons, so absolutely dominant driver of global
Speaker 1: copper demand today. And green demand, which we categorize as
Speaker 1: electric vehicles, electric vehicle charging infrastructure, and then the kind
Speaker 1: of green power sector so wind and solar. That that
Speaker 1: only amounts to about one and a half million tons
Speaker 1: of copper demand today. But if you look at what's
Speaker 1: going to play out over the next five ten years,
Speaker 1: that balance between green and non green demand is going
Speaker 1: to switch quite quite sharply. By five green demand will
Speaker 1: have doubled, gone to closer to three million tons, and
Speaker 1: by the end of the decade UM that that number
Speaker 1: will have risen to between six to seven million tons.
Speaker 1: So green demand will go from from today being only
Speaker 1: about five per cent of the global demand too too
Speaker 1: closer to so an immense uplift UM, and I mean
Speaker 1: I think he is. It's already starting to play out.
Speaker 1: You know, we're already seeing um incredible growth in the
Speaker 1: EB sector, particularly in China. UM. You know, the growth
Speaker 1: rates there are spectacular, you near doubling UM in market size, UM,
Speaker 1: well beyond any any expectation. UM. If you went back
Speaker 1: to the beginning of this year or next year, but
Speaker 1: but also in Europe as well, um and we're also
Speaker 1: starting to see really aggressive growth in green infrastructure um
Speaker 1: and and that's not just China that that's Europe as well.
Speaker 1: So you know, it's no longer theoretical demand. Even though
Speaker 1: it's a small part of the market, it's growing at
Speaker 1: a very rapid rate um and that that rate is
Speaker 1: going to accelerate over over the course of the next
Speaker 1: few years. So I think I'm going to ask the
Speaker 1: same question, but just from the supply perspective, So where
Speaker 1: does copper come from? Or maybe a better question is
Speaker 1: how hard is it to get copper? Because I think
Speaker 1: copper I think, you know, big minds that are bringing
Speaker 1: out new supply. But I also remember back in two thousand,
Speaker 1: two thousand nine, when we also had very high copper prices,
Speaker 1: there are all these stories about people stealing scrap metal
Speaker 1: in order to get bits of copper and sell them
Speaker 1: for loads of money. So how difficult is it to
Speaker 1: actually source and what is the supply path actually look
Speaker 1: like for the next few years. Yes, So, I mean
Speaker 1: I think the first point to make is that there
Speaker 1: isn't a shortage of copper and the Earth's crust that
Speaker 1: you know, there are a lot of potential mindable options
Speaker 1: out there, but we're just not seeing capital flowing into
Speaker 1: into those projects. Um yeah. And I think it's very
Speaker 1: different to what we saw in the two thousand's because
Speaker 1: in two thousand and two, when that that kind of
Speaker 1: respective ball market began, almost immediately you saw the supply
Speaker 1: side respond. You saw projects being approved and investment flowing rapidly,
Speaker 1: and the supply side really, you know, almost moved in
Speaker 1: lockstep with the increase in price. This time around, that
Speaker 1: isn't occurring at all. You know, over the last two years,
Speaker 1: even though copper, the cop price has doubled, there hasn't
Speaker 1: been a single new copper mine fruit. Um. So it's
Speaker 1: just startling difference. And I think the reasons for that
Speaker 1: are similar to some of the issues facing broader commodity
Speaker 1: extraction industries. But I think the number one constraint on
Speaker 1: on the copper mining industry is the experience of the
Speaker 1: last cycle, Because the mining industry faced a near death
Speaker 1: experience in as a result of the over build in
Speaker 1: response to to to high prices in in in the
Speaker 1: mid late two thousands, and I think now you have, um,
Speaker 1: you know, a a much more conservative mentality amongst management
Speaker 1: teams in the mining sector, reflecting that at that experience. UM.
Speaker 1: And so that conservatism is very difficult to to to
Speaker 1: a road, and it's certainly still firmly in place. UM. Look,
Speaker 1: I think it's not just that though. Also I think
Speaker 1: you know what's different now to twenty years ago is
Speaker 1: also you know, we have the E s G influence
Speaker 1: on investor allocation, but also at a micro level, so
Speaker 1: less capital has flown into into commodity sectors because they
Speaker 1: haven't screened well through through the s G filter. But
Speaker 1: but also you know, at a micro level, at a
Speaker 1: mining level, if you want to build a copper mine today,
Speaker 1: even before you break ground, um, you will will spend
Speaker 1: two to three years waiting to get the right permits
Speaker 1: to actually move forward with construction. Twenty years ago, that
Speaker 1: same process to six maybe twelve months maximum, So much
Speaker 1: much higher hurdles from an environmental and social perspective. Is
Speaker 1: this a global phenomenon that everywhere around the world, because look,
Speaker 1: I've are particularly surprised that, say, in certain developed markets
Speaker 1: that people that there's been a big change in terms
Speaker 1: of the environmental expectations and the permitting process. But is
Speaker 1: this like a global phenomenon because I didn't I don't know,
Speaker 1: you know, I think about the US in particular, maybe Europe,
Speaker 1: But has everywhere in the world essentially gotten more stringent
Speaker 1: about these things. Yeah, I mean, look at one of
Speaker 1: the hardest places in the world to get a copper
Speaker 1: project going today is Chili, and Chili is the Saudi
Speaker 1: Arabia of the copper market, and that is one of
Speaker 1: the places where the permitting process has more than tripled
Speaker 1: in length. So it is, it is incredibly difficult. But
Speaker 1: I think the other problem is that, you know, young
Speaker 1: people have not been going into the mining sector for
Speaker 1: the last decade. They've been going into you know, tech
Speaker 1: or you know kind of and so what that means
Speaker 1: is you've got a real bottleneck now on skilled labor
Speaker 1: in the industry. There aren't enough engineers to support a
Speaker 1: project if you if you want to want to get
Speaker 1: it off the ground. So that's practical bottlenecks. There's E
Speaker 1: s G bottlenecks, and there's just conservatism around spending money.
Speaker 1: And on top of that, investors getting a great cash
Speaker 1: return story from from the lining sector, very very high
Speaker 1: free cash show yields, and they're not demanding growth from
Speaker 1: from the sector either, So you know, we're not we're
Speaker 1: first innings in terms of the supply response for for copper. Suddenly, Tracy,
Speaker 1: it's just so fair saying how so many of these
Speaker 1: stories keep a lining of totally having to unlearn the
Speaker 1: lessons essentially of the last decade in order to make anything. Yeah,
Speaker 1: it's we internalize trauma from the last cycle, and now
Speaker 1: we're very careful about fueling the next boom bust cycle.
Speaker 1: But in the meantime you get this under investment um
Speaker 1: and higher prices, but they don't seem to do very much.
Speaker 1: One thing I'm wondering is, let's assume that everything stays
Speaker 1: pretty much as it is. Environmental regular ations stay put
Speaker 1: because people do care about the climate, and there are
Speaker 1: concerns about digging stuff out of the earth. There's continued
Speaker 1: under investment for various reasons. How fungible is copper, Like,
Speaker 1: what are the alternatives that could be used when it
Speaker 1: comes to something like electrifying a car or something like that. Well,
Speaker 1: I think one thing we've got to recognize about copper
Speaker 1: is that it is not a raw material where it
Speaker 1: has close competitors in its key role as a as
Speaker 1: a conductor, because it's such a good conductor UM that
Speaker 1: you know, it really has a primacy over its key
Speaker 1: roles in the grid in cars UM. Now that's not
Speaker 1: to say there aren't other potential conductors, but things like
Speaker 1: aluminium UM you know, require a lot more aluminium to
Speaker 1: achieve the same level of conductivity as copper, and so
Speaker 1: it's just not practical for uses where you have a
Speaker 1: small amount of space UM. And so really there isn't
Speaker 1: a competitor for copper for you know, for for for
Speaker 1: the majority of of its key roles UM. That's not
Speaker 1: to say that there couldn't be some substitution towards other
Speaker 1: raw materials in UM kind of less space confined UM. Use.
Speaker 1: I think aluminium is is top of that list. But look,
Speaker 1: if you look at the aluminium market right now, that's
Speaker 1: facing its own UM story of of of under investment
Speaker 1: on the supply side and also is levered to to
Speaker 1: the green transition UM and that's reflected in the very
Speaker 1: rapid run up in aluminium price that we've seen over
Speaker 1: the last eighteen months. So the most obvious potential substitute
Speaker 1: is also facing near record pricing, and so it's not
Speaker 1: an attractive UM kind of substitution choice. So I mean,
Speaker 1: I think the answer to you would be, there isn't
Speaker 1: really an obvious UM sort of raw material that can
Speaker 1: step in UM. Now, look, necessity is the mother invention UM.
Speaker 1: And you know, if copper prices go to the levels
Speaker 1: that the weird expect, if not higher, then you will
Speaker 1: that incentivize much greater efforts in in terms of trying
Speaker 1: to find alternatives or perhaps more reasonably kind of dilution
Speaker 1: of the level of copper used in some of these
Speaker 1: UM areas, and that could well play out not just
Speaker 1: in non green uses, but also new new areas. So
Speaker 1: you may well see slightly less copper used in an
Speaker 1: eavy in five ten years time, partly because of the
Speaker 1: high prices and just partly because it's technology that's new,
Speaker 1: that's developing, and over time they'll find efficiencies. I think
Speaker 1: that's probably more of the demand effect you'll see than
Speaker 1: you know, a kind of a material step away from
Speaker 1: copper to another raw material. You said something that I
Speaker 1: want to go back to because it seems extremely important
Speaker 1: and it's not something I don't know if any other
Speaker 1: guests have really talked about it, which is the talent crunch.
Speaker 1: So it's like, Okay, we understand there's the cash shortfall,
Speaker 1: the reluctants to invest and the under investment and so forth,
Speaker 1: and the sort of E. S G. Environmental considerations, but
Speaker 1: of course we just hit this decade right where if
Speaker 1: you're a talented person, there's and you want to make
Speaker 1: money and have a booming career. Probably went into software
Speaker 1: or there was a really good uh thing like that,
Speaker 1: can you or something like that? Can you talk more
Speaker 1: about this idea, the talent shortage of like what happens
Speaker 1: when sort of like the best and the brightest don't
Speaker 1: want to work in extractive industries. Well, I mean, I
Speaker 1: think I think the most obvious impact is that you
Speaker 1: just have a shortage of labor to drive supply adjustments.
Speaker 1: They literally are handful of teams recognized around the world
Speaker 1: who are good at UM, building UM and growing production
Speaker 1: at comple minds. Now that reflects that the lack of
Speaker 1: new entrants into the mining market, but I think that
Speaker 1: that really just limits the pace at which you can
Speaker 1: undertake new new projects. So even if you decide today,
Speaker 1: you know, we are going to spend several billions on
Speaker 1: a new copper mine, You're still going to struggle to
Speaker 1: find that the engineering engineering team to to support that.
Speaker 1: So I think that's a bottleneck and and and a
Speaker 1: further delay on response. But of course the other aspect
Speaker 1: is that you know, you probably can find the right team,
Speaker 1: but you're gonna have to pay top dollar together. And
Speaker 1: so that then feeds into this risk of capital cost escalation,
Speaker 1: which is exactly what we saw back in the two thousands.
Speaker 1: Prices of of inputs into projects, labor, machinery, fuel, you know,
Speaker 1: we're all rising rapidly, and so initial capital costs for
Speaker 1: projects ended up being far too low versus where they
Speaker 1: ended up. And I think that's that's a very old
Speaker 1: risk that that we're facing in the mining sector today.
Speaker 1: And on top of that, it means costs are just rising.
Speaker 1: So the cost curve in in the copper mining industry
Speaker 1: and in many other metals is inflating. And and the
Speaker 1: top end of the cost curve, the most expensive minds
Speaker 1: in the world to operate, is now within touching distance
Speaker 1: of today's copper price. Um. So I mean that's actually
Speaker 1: important for supporting where prices are but it doesn't solve
Speaker 1: anything in terms of the structural imbalances in this this market.
Speaker 1: It just makes that more expensive to solve and ultimately
Speaker 1: supports the idea that we need much much higher prices
Speaker 1: than we have today. So just on the existing I
Speaker 1: guess sort of wanting to have questions, but what is
Speaker 1: the supply outlook look like for the existing set of
Speaker 1: copper minds that they're in production, Like how much are
Speaker 1: they going to fade in terms of how much more
Speaker 1: it can be pulled out of them? You at what
Speaker 1: point will we see the down break so to speak,
Speaker 1: where these high prices in this high demand actually does
Speaker 1: induce someone somewhere to get break ground on a new mine,
Speaker 1: Like when is that going to happen? Yeah? So I
Speaker 1: think if you look at current production, what we have
Speaker 1: over the next twelve months is a kind of final
Speaker 1: spurt of growth UM set to come through UM and
Speaker 1: then we hit peak production at the end of twenty three.
Speaker 1: In the in the beginning UM quarter, so there is
Speaker 1: a little bit of growth that's from a small number
Speaker 1: of projects in Chile, Peru and UM and in the
Speaker 1: copper belt in Africa. But then after that we essentially
Speaker 1: flatline and then on the kind of current guidance from
Speaker 1: from producers, we'll start to enter a phase of open
Speaker 1: ended contraction of around one percent a year from um So,
Speaker 1: I mean that's pretty pretty set in stone. Um. Look,
Speaker 1: I think you know in terms of you know, what's
Speaker 1: the that the kind of point that that kind of
Speaker 1: changes that. Um, I think it really has to be price,
Speaker 1: But I think it also has to be a realization
Speaker 1: that you know, copper is it absolutely key raw material
Speaker 1: for the green transition and is going to be a hurdle,
Speaker 1: a bottleneck on the planned pace of of decorganization. Um,
Speaker 1: We're just not going to have enough copper around to
Speaker 1: support the necessary growth in in green technologies on the
Speaker 1: kind of current road map. So I think you know
Speaker 1: that means price has to be absolutely key, But I
Speaker 1: think it also has to be a function of policy
Speaker 1: makers governments kind of grasping that fact and and perhaps
Speaker 1: kind of easing the ability to to to to grow
Speaker 1: product and um So, I think it's a confluence of factors.
Speaker 1: Um But absolutely number one, it has to be much
Speaker 1: much high prices because the day's price is not moving
Speaker 1: the need at all. In terms of producers interest in investment.
Speaker 1: So one thing we've seen recently with certain commodities that
Speaker 1: might be in immediately tighter markets are the actual customer
Speaker 1: of these commodities trying to secure their own supplies. So,
Speaker 1: for instance, Tesla signing deals in order to get stuff
Speaker 1: like nickel from specific suppliers. Is that something that you
Speaker 1: would expect to happen with copper, that sort of vertical
Speaker 1: integration or you end users actually trying to strike deals
Speaker 1: to source their own supply. I think it's I think
Speaker 1: it's perfectly possible because I think the the the issues
Speaker 1: that the copper face faces right now is farmer or
Speaker 1: extreme than than some of the battery raw materials where
Speaker 1: where you've seen that proposed um. You know, I think
Speaker 1: we're not in as acute a stage of shortage today
Speaker 1: as some of those other metals, and so it's not
Speaker 1: as front and center in terms of potential strategy. But
Speaker 1: I think in two three years time, given how tight
Speaker 1: you know things are going to get, we will be
Speaker 1: hearing very very similar conversations around cop But now that's
Speaker 1: absolutely too late. Those conversations need to be happening today,
Speaker 1: and you know, if the miners are not willing to
Speaker 1: to start to invest, then it should be these key
Speaker 1: downstream consumers who are who are pushing pushing that. So
Speaker 1: I think, yes, absolutely, I think that will have to happen, um,
Speaker 1: But it will probably happen too late. Um. And you know,
Speaker 1: as a result, prices are going to go absolutely ballistic
Speaker 1: to the upside and and you know the downstream will
Speaker 1: suffer because of the current sort of transigence in terms
Speaker 1: of supply investment. What are the environmental costs of mining?
Speaker 1: I mean, obviously I assume the people who the countries
Speaker 1: and governments that are reluctant to rapidly approved new minds
Speaker 1: have legitimate concerns about the environmental risk? What are they?
Speaker 1: And then specifically like how much do we all have
Speaker 1: to become Chilean political experts now to understand what's going
Speaker 1: to be happening in the comment in the coming years. No,
Speaker 1: I think the from a mining perspective, you know, I
Speaker 1: think the mining sector has actually been very good at
Speaker 1: reacting to the new kind of e s G. Standards
Speaker 1: on on on operations. So you know, I think you
Speaker 1: know that that there's no kind of challenge for the
Speaker 1: for the mining sector in terms of respecting new rules.
Speaker 1: You know, respecting nature um kind of water supply, Like
Speaker 1: what is like mining due to the water supply or
Speaker 1: what how what have we seen in terms of the
Speaker 1: environmental it's not a it's not so much that it
Speaker 1: doesn't even supply. Just the mining sector is a relatively
Speaker 1: intensive use of water, um. And so if you have
Speaker 1: a mine up in high in the in the mountains
Speaker 1: in the Andes and local communities around there, then um,
Speaker 1: governments want water to to you know, to to flow
Speaker 1: to to local communities and so yeah, no, there's no
Speaker 1: question of that at all. But I think what it
Speaker 1: means is that the miners have then had to invest
Speaker 1: in essentially pumping seawater up from up to the to
Speaker 1: the operations and detailization plants. So what does that mean, Well,
Speaker 1: it just means additional costs and time in terms of
Speaker 1: getting that the mind's up to um that the kind
Speaker 1: of level of operation they need. Now on top of that,
Speaker 1: in some regions, you've you've had pretty bad drought and
Speaker 1: certainly that's been an issue in Chile, an ongoing issue
Speaker 1: in Chile for the last few years. And you know,
Speaker 1: depend mining is a very water dependent process. The more
Speaker 1: water you have, the higher the throughput of of the
Speaker 1: kind of are through the system and the yields get
Speaker 1: on that. So what is the water I don't know
Speaker 1: much about mining engineering. What is the main use? Well,
Speaker 1: you're well, you essentially have to kind of wash the
Speaker 1: material that's coming out of the ground. So it's a
Speaker 1: kind of a cleansing process. And so you know, the
Speaker 1: lower the flow of water through that, the kind of
Speaker 1: lower the kind of essentially the the yield. So it
Speaker 1: is key, um. But mining companies are resolving that, but
Speaker 1: you know it adds cost to to to the systems.
Speaker 1: So I look, I think it's there's no doubt the
Speaker 1: mining sector, particularly copper mining sector, has been successful at
Speaker 1: that adapting to E S g M hurdles and I
Speaker 1: think if anything held itself to very high standards before
Speaker 1: you know, that became a can of official mantra. But
Speaker 1: you know that comes with um with additional cost and
Speaker 1: time in terms of getting projects up to speed. So
Speaker 1: what's the bear case for copper here? And the reason
Speaker 1: I ask is because um, I saw an article on
Speaker 1: the Institute of Electrical and Electronics Engineers, which obviously I
Speaker 1: read very religiously, and the article was called Practical Power
Speaker 1: beaming gets real. And this was like Nicola Tesla's dream,
Speaker 1: right that instead of using wires or some type of
Speaker 1: physical conductor to transmit energy, you could actually do it
Speaker 1: in a different way, like a bolt of lightning that
Speaker 1: goes from one thing to another, that sort of thing.
Speaker 1: And I mean, I wonder, is that the ultimate bearer
Speaker 1: case for copper, that we developed some sort of new
Speaker 1: technology g that means you actually don't have to conduct
Speaker 1: through wires. Well, yeah, I mean I think that. I
Speaker 1: think there are there are two two things that could
Speaker 1: transform the story. The first would be if we get
Speaker 1: a production technology shift. So we've we've seen that play
Speaker 1: out in other commodity markets over over the last twenty years.
Speaker 1: The most obvious is oil and shale um in the US.
Speaker 1: Is there any evidence of that type of production technology
Speaker 1: shift occurring in copper? The answer would be no. You know,
Speaker 1: there's some developments at the margin around achieving higher return
Speaker 1: from from tailings deposits, which which is the waste that
Speaker 1: minds generate during the production process. Typically those tailing deposits
Speaker 1: are kind of left on the side, But but there
Speaker 1: is some technology being developed that that can actually achieve
Speaker 1: a quite a high return on on the copper within
Speaker 1: those but that's really a marginal production game that there's
Speaker 1: certainly nothing along the lines of shale, and I think
Speaker 1: even if there was, if you look at the history
Speaker 1: of production technology in the mining sector, it's incredibly slow
Speaker 1: to adapt. So in copper back in the there was
Speaker 1: a new production process called s x CW that that
Speaker 1: actually became quite a meaningful influence on production, but not
Speaker 1: until the end of the nineteen nineties and into the
Speaker 1: twenty ten so it took it took over a decade
Speaker 1: for that technology to to scale up and have a
Speaker 1: mass adoption. So there's nothing on that line, you know,
Speaker 1: in our line of side um and even then I
Speaker 1: think it would be very slow. So that's not a
Speaker 1: solver at least in the in the twenties. And and
Speaker 1: then you know on the demand side that that there
Speaker 1: isn't an obvious raw material competitive substitute. You can't rule
Speaker 1: that out. There's clearly a lot of work being done
Speaker 1: on these kind of alternatives, but we just don't see
Speaker 1: that that happening. And I think that's why when we
Speaker 1: look at the story, that just isn't the mind supply
Speaker 1: response coming through in time to to to meaningfully kind
Speaker 1: of lower the deficits in this market. So mind supply
Speaker 1: and argue is not going to be the solver um
Speaker 1: and then so what are we left with? Well, you know,
Speaker 1: really what you're left is is demand destruction. And I
Speaker 1: think this is why we have such a bullish target
Speaker 1: on copper because to achieve demand destruction end demand destruction
Speaker 1: in copper it is much much harder than in agricultural
Speaker 1: or energy products. And the reason for that is that
Speaker 1: the end consumer in the in the goods that they
Speaker 1: consume that that have copper, copper is really a very
Speaker 1: small part of the cost of that good, the price
Speaker 1: of the good that they face. So for the for
Speaker 1: the copper price to drive demand destruction in in cars,
Speaker 1: in in in electronics, you're gonna have to see a
Speaker 1: massive outsized move in the copper price to achieve that
Speaker 1: the necessary increase in in in the cost of the
Speaker 1: total good to drive that destruction. At demand destruction, it's
Speaker 1: very different to energy and agricultural um commodities, where you're
Speaker 1: really go nearly majority exposed to the oil price or
Speaker 1: or you know, the wheats price with the food on
Speaker 1: your your table. It just doesn't work their way in metals.
Speaker 1: This is really fascinating. I haven't thought about that. So
Speaker 1: copper is absolutely crucial to e vs, but it's not
Speaker 1: so big of a factor in the price of an
Speaker 1: evy that it's actually gonna like change anyone's planned to
Speaker 1: build or buy one until you just get run up.
Speaker 1: But you know, we just have like a couple of
Speaker 1: minutes left here, So we're at you know, in London,
Speaker 1: I think the element price is right around n a ton.
Speaker 1: For the price of copper, what are the scenarios where
Speaker 1: it could go? I think I've seen fifteen thousand, But
Speaker 1: what are the scenarios? And then if we were to
Speaker 1: gain some sort of demand destruction, like are there any
Speaker 1: use cases at that price, it becomes economical and they'd
Speaker 1: have to drop off. I think yeah. I mean, the
Speaker 1: reason we see prices going to fifteen thousand are you
Speaker 1: know one. We're already in a very time market. The
Speaker 1: COVID fiscal stimulus effects of the last two years have
Speaker 1: generated incredibly large deficits in many metals, copper included, and
Speaker 1: so we start really this this kind of green supply
Speaker 1: crunch story already with very very low inventories in the system,
Speaker 1: but then the next leg higher is ultimately going to
Speaker 1: be a reflection of that progressive green supply crunch, essentially
Speaker 1: removing the remaining inventory from the system over the next
Speaker 1: three years, and then the market having to go to
Speaker 1: incredibly high price levels to generate that end demand destruction.
Speaker 1: That the thing about the copper market is that we've
Speaker 1: never been in such an extreme set of fundamental circumstances.
Speaker 1: We've never had to go to end demand destruction pricing
Speaker 1: to achieve a rebalancing. That the ballmarket of the two
Speaker 1: thousands was nearly entirely solved by supply responses and and
Speaker 1: that very rapid increase in mine investment, that that's clearly
Speaker 1: not going to be the majority solver this time. So
Speaker 1: when we say fifteen thousands, what we're saying there is
Speaker 1: copper is going to have to go to a price
Speaker 1: level well beyond any level we've seen before historically to
Speaker 1: to to achieve that demons structure could fifteen thousand prove conservative, absolutely,
Speaker 1: And the reason why I say that, look at oil
Speaker 1: in the two thousand's. Oil started that decade um trading
Speaker 1: ten twenty dollars a barrel and ended the decade trading
Speaker 1: you know, hundred fifty dollars a barrel, so sevenfold increased
Speaker 1: in price to adjust the market enough to solve imbalances
Speaker 1: that all faced in two thousands that were very similar
Speaker 1: to what the copper market faces today. So we don't
Speaker 1: rule out the copper. Could could be a fifty thousand,
Speaker 1: could be a hundred thousands other commodities, and that there
Speaker 1: are plenty of commodities that have achieved that. Look at lithium.
Speaker 1: You know, lithium is trading five times above six times
Speaker 1: above the cost curve today. This does happen in commodity
Speaker 1: markets when you face such extreme fundamental imbalances and price
Speaker 1: has to go to such extremes to to solve that.
Speaker 1: That set up, well, Nick, this was absolutely fascinating. We're
Speaker 1: we could talk to you for a long time. We could.
Speaker 1: We've got to have you back on again at some point,
Speaker 1: but I learned a lot, really appreciate you coming on
Speaker 1: our lights, and I will be paying close attention to
Speaker 1: copper over the next decade for sure, because that was
Speaker 1: a very high But if it's having me, thanks so much, like, Yeah,
Speaker 1: that was fantastic, Wow, Tracy, A hundred dollar copper do
Speaker 1: you hear that yeah, and I'm I mean, I'm looking
Speaker 1: at the price chart of lithium to his point and
Speaker 1: like five, yeah, uh, it is not unheard of. The
Speaker 1: one thing that that struck me in that conversation and
Speaker 1: you picked up on it already. But just this idea
Speaker 1: of how difficult it is to get away from these
Speaker 1: boom bust cycles because everyone comes out of the last
Speaker 1: experience thinking that's the way the market is, that's the
Speaker 1: way the world works, that's the way it's always going
Speaker 1: to be. Uh, and then they proceed to become very
Speaker 1: fiscally conservative. It's all about cash flow versus funding new
Speaker 1: exploration and digging, and then we end up with a
Speaker 1: tight market and then it seems like it's hard to
Speaker 1: get out of that. I guess this is the question, right,
Speaker 1: like whether or not higher prices do incentivize more production,
Speaker 1: or whether or not something has fundamentally changed. It really
Speaker 1: is striking. I mean, I'm I was always sort of
Speaker 1: a lawyer. They're like, Okay, you have short cycle, short
Speaker 1: cycle commodities and long ones. So it's like, you can
Speaker 1: start to ramp up oil production pretty fast right now.
Speaker 1: If you added some more rigs, you could theoretically add
Speaker 1: acres to agriculture and get more weak corn and soy,
Speaker 1: you know, in a sort of somewhat seasonal, timely manner
Speaker 1: in a few months. But I was always sort you know,
Speaker 1: I understand that it's not an overnight or even one
Speaker 1: year process to get a new mind online. But the
Speaker 1: fact that like we're now in this two year commodity
Speaker 1: of bowl market and we're still haven't seen any groundbreaking
Speaker 1: on anything we might need even higher prices yet. And
Speaker 1: than given that that was pretty straight is like it
Speaker 1: used to be nine months and now it might be
Speaker 1: three years. That like you can start to see why
Speaker 1: this could be. As you know, Jeff said the last
Speaker 1: time we talked to him, the tightest commodity market we've
Speaker 1: ever seen. It also kind of begs the question of
Speaker 1: whether or not you need some sort of stability mechanism there. So,
Speaker 1: you know, the oil and gas market has Opeque, which
Speaker 1: has at various times been described as the central bank
Speaker 1: for for crude oil. And I wonder if you had
Speaker 1: something to sort of soften some of those troughs and
Speaker 1: peaks or just try to offset human nature, right, and
Speaker 1: then the fear greed cycles, I don't, Yeah, that's probably
Speaker 1: it's Yeah, the lithium chart, by the way, that it's insane.
Speaker 1: I hadn't realized. I didn't realize either that lithium chart
Speaker 1: is completely nuts and yeah, and so like also I
Speaker 1: thought his point was really interesting about like how the
Speaker 1: end users of copper, for as important as it is,
Speaker 1: it's not the key. And so it's like you could
Speaker 1: have like one, I don't know, triple of the copper price.
Speaker 1: It's not going to affect the price of a tesla
Speaker 1: that much, right, Right, And so you get in this
Speaker 1: situation which like, well, it's not going to discourage any buyers,
Speaker 1: and so the demand just keeps going straight up. Anyway,
Speaker 1: so much in there, and I've we got to do more,
Speaker 1: like on the whole talent thing, like all these people
Speaker 1: who are like I think, yeah, I think this is
Speaker 1: exactly what it is, right is you think of it
Speaker 1: as a market, but ultimately the decisions that are impacting
Speaker 1: the market are being done by actual people. And so
Speaker 1: we need to talk to like the head of a
Speaker 1: mining company and ask them why don't you drill more?
Speaker 1: Why don't you dig more? And we need to talk
Speaker 1: to our minor, and we need to talk to the
Speaker 1: Dean at the Colorado School of Mine, Texas A and
Speaker 1: M about like our students excited about going into mining again. Yeah,
Speaker 1: I think we should do that, all right? All right?
Speaker 1: Should we leave it there? Let's leave it there. This
Speaker 1: has been another episode of the All Thoughts podcast. I'm
Speaker 1: Tracy Alloway. You can follow me on Twitter at Tracy
Speaker 1: Alloway and I'm Joe Isn't All. You can follow me
Speaker 1: on Twitter at the Stalwart, follow our producer Carmen Rodriguez
Speaker 1: at Carmen armand follow the Bloomberg head of podcast for
Speaker 1: Shsica leaving at Francesca Today, and check out all of
Speaker 1: our podcasts at Bloomberg under the handle at podcasts. Thanks
Speaker 1: for listening.