By Macro Ops

The Commodity Supercycle is one of the most important themes we’ve been tracking at Macro Ops over the last year. And while there are many causes of this megatrend, one key aspect that’s propelling prices is the global transition to green energy. This forced shift has created a massive supply/demand imbalance in the raw mineral space. The following report will dive into what’s going on and how to profit from it.

A Forced Green Demand

How does a politician stop global warming? 

By deeming it illegal of course. 

And that’s exactly what various governments are doing. 

California, for example, has declared that by 2035, 100% of new cars and light trucks sold must be zero-emission vehicles. 17 other states liked that idea and followed suit with similar regulations. And even the European Union banned sales of all new fossil fuel vehicles by 2035.

And while these regulations sound great in theory, they aren’t realistic. 

For example, California’s new regulations massively accelerate the number of zero emission new vehicle sales automakers will need to hit each year: 

And although automakers wish they could have a steady growth rate like that, especially as the economy heads into a recession, it’s not realistic. 

Reaching 2030 net-zero goals globally means an 18x increase in EV sales: 

And while we’ve focused on cars so far, they obviously aren’t the only carbon producers. Today’s global energy system relies on fossil fuels to meet 80% of demand. But nonetheless, governments like the US’ have set targets of reducing greenhouse gas emissions for the energy grid by over 50% by 2030, with a goal of reaching net-zero emissions by 2050.

It’s a Herculean task to try and convert the entire energy grid in this short amount of time. And that’s before considering the actual material costs.  

For example, a standard electric car requires 6x more mineral inputs than a conventional car. And a wind plant requires 9x more mineral resources than a gas-fired power plant. 

Copper in particular is a key input because it sits in the middle of capturing, storing, and transporting all these new green sources of energy. Its ductility, electrical and thermal conductivity, and low reactivity make it a crucial part of electrifying the grid. And that’s why it’s used in a majority of green technologies: 

According to Goldman Sachs, because of its wide use, copper demand from green tech is expected to grow between 600% and 900% over the next decade:

So clearly the demand for these materials is there, forced or otherwise. But what about the supply? Where will all of it come from?   

A Dry Green Supply 

The supply picture of the commodities required for this green transition is not pretty.  

Bloomberg’s Oddlots podcast had a great interview with Goldman metals strategist Nick Snowdon about the supply issues with copper in particular. 

As Snowdon explains, the problem isn’t with the amount of copper we’ve got in the ground, but with the investment being put towards extracting it. 

The copper industry has been suffering from the downside of the Capital Cycle — a cycle in which investments flood into high-return businesses during upswings and then flee when returns fall below the cost of capital. It plays out like the following: 

Demand outpaces supply in a particular industry, launching prices higher. Capital flows into this industry to capture these new profits which results in new investments, greater capacity, and more competition. Inevitably, capital gets misallocated as companies over-optimize to maximize their profits. The industry becomes crowded as supply begins to outpace demand.  Returns eventually fall below the cost of capital, causing investment to rapidly exit as capacity is reduced. This continues until demand once again outpaces supply, profitability returns, and the cycle starts all over again.
You can see how this boom/bust cycle works in the following diagram: 

This is exactly what happened in the copper industry. 

In the 2000s there was a copper bull market and rising prices led to heavy investment in the sector with new projects being quickly approved. This was the upside of the Capital Cycle.  

But by the mid 2010’s, the economics flipped and copper prices cratered. This decimated the entire mining industry, especially those companies that over-optimized and over-invested. This was the downside of the Capital Cycle and it’s where we are now. 

Even though the price of copper has more than doubled over the past 2 years, new copper mines aren’t being approved. Executives are gun shy and don’t want to invest because of what happened the decade prior. 

Plus, the yield of copper ore itself has decreased by over 30% since 2005. The following is a chart of the grade decline of copper in Chile. If copper was oil, Chile would be Saudi Arabia. They set the pace in the market.   

Declining yields like this means that it takes a larger amount of the newly mined, lower-grade copper to meet the same demand as the previous higher-grade copper. 

This puts upward pressure on production costs by requiring more mining activity with more technological innovation and efficiency improvements. The whole thing becomes far more expensive.   

These difficult economics are why CAPEX in the resources sector is now hitting 15-year lows

But even if these companies disregarded all of that and decided to ramp up production anyway, it would still take too long. 

Copper is a long-cycle commodity — it requires 2-3 years to extend an existing mine and as long as 8 years to establish a new one. 

And that’s before accounting for what ESG regulations have done to the space. Nowadays it takes 2-3 years just to get a permit for a mine. 20 years ago it took 6-12 months max. Environmental hurdles have really slowed things down. 

A lot of investor money has also been taken away from the industry because companies in the mining space don’t screen as well through the ESG filter most investment funds now have.

Ironically enough, complying with Greta Thunberg is hindering our move towards more sustainable energy.  

And to top all of this off, there’s a bottleneck on skilled labor in the mining industry. There aren’t enough engineers to support new project deployments because they all went into tech to make Candy Crush more addictive. 

This has all led to a long-term supply gap that is more than twice the size of the one that started the copper bull in the early 2000s. 

A recent report from Wood Mackenzie estimates that 9.7 million tonnes of new copper supply is needed over the next 10 years to meet climate change goals — an equivalent of nearly a third of current refined consumption. 

Meeting that supply would require putting a new La Escondida, the world’s largest copper mine by a country mile, into production each year.  

That’s not going to happen. And with massive, growing demand chasing after limited supply like this, copper prices will explode.   

Copper’s Path Higher

Goldman predicts that if copper prices stay where they are now, between $8,000 and $9000 a ton, then market inventories will be depleted in the next few years. The current price is also not high enough to incentivize new mining projects to fix the supply imbalance. Considering this, they believe copper is on a path to $15,000/t by mid decade. That’s over a 2x price increase in the next few years. 

We think that’s a conservative estimate. Either way, our team is positioning our portfolio to benefit. We just started building a position in Foran Mining Corp (FOM.TSXV in the Canadian markets or FMCXF in the OTC markets) and will continue adding a variety of different copper positions in the months to come.   

Now the copper industry is just one part of the overall Commodity Supercycle we’re facing