In the 1967 coming-of-age classic, The Graduate, the young protagonist played by Dustin Hoffman is given some advice by a friend of his parents: ‘I want to say one word to you….plastics….there’s a great future in plastics.’
If the film were remade today, I suspect the word would be different. The key commodity in the next few decades is likely to be a soft, malleable and ductile red metal with high thermal and electrical conductivity. Today’s graduates might be advised to think about a future in copper.
Think about today’s growth sectors - renewable energy generation, electric vehicles, artificial intelligence - and the one thing they all have in common is an insatiable appetite for copper. To take one example, it requires three times as much copper to generate the same amount of electricity on a solar farm as in a gas-fired power station. Nearly eight times as much using offshore wind.
The new energy infrastructure that will be required to make the transition to a low carbon future requires less fuel but more materials. Same story with electric cars, which require six times as many minerals as conventional vehicles. It is one of the ironies of the green revolution that the solution requires investment in the problem. Basic materials account for 15pc of total greenhouse gas emissions and miners cause harm to the environment. But without them there is no net zero.
This is why BHP has alighted on Anglo-American. And why the target has rejected a £30bn bid as ‘highly unattractive’. We should expect BHP to raise its offer and it may also end up in a battle with other potential bidders. While the demand for copper is likely to remain high for years to come, matching it with supply is going to be difficult. The time between exploration and production is measured in years and it is very costly.
Buying existing supply is a cheaper, quicker and easier option - but there aren’t many pure play copper miners available. Anglo is a sprawling empire that also includes iron ore, platinum and diamonds, but it’s a digestible bite for BHP which is valued on the Australian Securities Exchange (ASX) at three times as much as its London-listed rival.
Lack of supply is one of the principal reasons to think that the price of copper, even at a two-year high of nearly US$10,000 a tonne, might be poised for further gains. Copper production, like that of all commodities, is highly cyclical. To make it worth the cost, the environmental challenges and the long and risky timescales, the price needs to rise from here. In recent years, dwindling demand from China’s struggling property sector has kept a lid on the price and made it more attractive for companies to hand cash out to shareholders rather than invest in new capacity. Between 2012 and 2020 capital expenditure in the copper industry fell by more than 40 per cent.
This is the perfect set up for one of the price super cycles that have come along every 30 years or so in the commodities world. Years of underinvestment and then a credible demand growth story. It’s what happened after the Second World War, when lack of investment during the depression gave way to soaring demand during the conflict and afterwards as Germany and Japan were rebuilt. In the 1960s, the catalyst was US President Lyndon Johnson’s Great Society spending splurge, and in the early years of this century it was China’s mass migration from the countryside to its cities.
The demand narrative has several strands. In addition to the copper-hungry renewable energy and electric vehicle sectors, there’s a potential new source of demand from data centres for artificial intelligence. In the US alone, it is estimated that energy requirements for these data centres will double in the next few years. This could be a big underestimate. Just meeting that demand could add 2 per cent to global copper demand. And in a tight market, that could quickly push the market into deficit and drive the price higher.
The history of the copper price illustrates how commodity prices tend to move. They do nothing for years, boring investors into submission, and then suddenly take off when the stars are aligned. In the case of copper, the price was higher in the mid-1970s than it was in 2003. But within three years it had quadrupled. Since then, it has moved sideways for nearly another 20 years, albeit with big swings along the way, and growing numbers of investors think its time may have come again.
Tom Stevenson is an investment director at Fidelity International. The views are his own.
