Why Copper May Be One of the Tightest Markets The World Has Ever Seen

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:17)

Tracy, I feel like a lot of our best episodes are often based on something in a previous episode, and we're like, oh, that sounds interesting. Like, you know, we did the dredging episode because of something that we learned about when we were talking about why your luggage was stuck, or why your goods were stuck.

Tracy Alloway (0:34)

Yes, that's exactly right. And this is a similar episode, isn't it? We heard something interesting and it came from the commodity space and we've decided that we need to dig in a bit further.

Joe Weisenthal (0:45)

Right. So earlier in the year, a couple months ago, I recall we were having a chat with Jeff Curry, who is the top commodity strategist at Goldman Sachs. And of course, the overall topic was just like this tremendous commodity inflation that has been like the story of much of 2021 and 2022

And a lot of the focus has been oil and a lot of the focus has been food. But then he also said that copper specifically might be one of the tightest commodity markets that we've ever seen in history.

Tracy Alloway (1:17)

Yeah, which is kind of surprising because, I mean, A, you just don't hear copper talked about as much as something like oil and gas. But B, if you look at the price chart of copper, it's been coming down in recent months, mostly because of concerns over China's economic growth and the lockdown and things like that. But it's not necessarily a market that is screaming structural underinvestment and supply tightness.

Joe Weisenthal (1:43)

Right. I think there's sort of like this long term story because the increases in demand for copper are expected to be very high.

Unlike oil, it takes a really long time to get new production online. It's not like you just put a new rig out somewhere in Texas or the Dakotas and start pumping.

So there's a lot of demand for copper. And although the prices are down recently, it's still up a lot since pre-crisis overall. So it's still like a tight thing. But I think structurally long term, apparently it seems like it's going to be a tough market.

Tracy Alloway (2:18)

Well, this is what I'm trying to get at, perhaps inelegantly, but copper is something that we don't talk about that much. But if you look at it, if you look at the long term dynamics, it seems to have some resemblance to what we've seen with oil and gas. So big booms and busts that kind of lead to structural underinvestment or under exploration and unwillingness to expand mines, also because of environmental concerns.

And then the reason that's so interesting is because if you look at what's going on with the attempts to electrify everything, attempts to bring down emissions and things like that, well, you're gonna need electric wires for that. And so copper becomes a really important strategic commodity that is nevertheless kind of underlooked at the moment.

Joe Weisenthal (3:04)

Yeah, totally. So the line that Jeff used in our podcast, he said, I would argue copper is likely to be the tightest commodity we'll have ever seen.

Jeff Curry (3:12)

It's much tighter than what oil was did during the 2000s. Let me remind you, oil went up 7X in the 2000s. Our forecast is 15,000 a ton on copper. But no matter what technology you use, you're gonna be using electricity.

And the only thing that can conduct electricity, given the rules around the periodic table and the rules of chemistry, is copper at the rate we need to conduct it.

Joe Weisenthal (3:38)

So it's like, all right, we got to follow up. And so we are going to follow up on copper with a colleague of Jeff's at Goldman Sachs.

We're going to be talking to Nick Snowdon, who runs metals research at Goldman Sachs, and he'll explain that line and what we should be watching for with copper. So Nick, thank you so much for coming on Odd Lots.

Nicholas Snowdon (3:58)

It's really a pleasure to be on with you both.

Joe Weisenthal (4:01)

What does that mean? When we talk about a tight commodity market, how do you define that?

Nicholas Snowdon (4:08)

Well, I mean, I think when we look at the outlook for the copper market, over the course of the next 3, 5, 10 years, what we see are essentially impossibly large deficits developing over that timeframe. By the middle of this decade, we're forecasting the largest ever deficit in the copper market, so just 2 years away from now. And by the end of the decade, the largest ever long-term deficit. I think what that's telling us relative to the starting point already of very low inventories is that this market has such severe imbalances that they're not resolvable at current price levels.