Jeff Currie on Why Copper Is His Highest-Conviction Trade Ever

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1:35Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Alloway. Tracy, copper has been on a tear again. Yes. Yes, it has. It's kind of weird because I remember recording a number of commodities related podcasts a couple of years ago where everyone was super excited about copper. And there was this long term, you know, structural theme about systemic undersupply. So the idea that we hadn't invested in new mines for ages and it took so long for new mines to come on stream that there just wasn't going to be enough copper to power all these new electric vehicles or electrify the grid, all these big things that the world wants to do.

2:21And then for a couple of years, copper just kind of went away. The price started dropping and now it's back. This is the problem, right? And I think that that interim fall and it did for like 2022 and much of 2023 is sort of back in the basement a little bit. This does seem to be the core problem that people have identified, which is that we can be almost certain that there is a long term huge demand for copper from all the capital spending that's going on for electrification in particular, EVs, et cetera. And we can also, I think, you know, as many analysts have observed, forecast supply fairly easily because we know what mines are out there.

3:02We know that mines have a really long lead time, et cetera, from decision to break new ground to actually producing copper. So like there are these certainties. But then the problem is like in the meantime, when you have these sort of periods of spot weakness where there isn't a supply shortage, where there's plenty of copper, you know, those periods don't exactly like encourage companies to like get mining or get digging. And in fact, they could slow down expansion plans, even if everyone sort of knows the long term math checks out. Absolutely. There's that mismatch between the short term and the long term outlook.

3:36There's also that tension on the ESG side of things as well. This idea that you want abundant copper in order to decarbonize the energy system. But at the same time, a lot of people who are ESG minded are going to feel very uncomfortable about encouraging new mines in Chile or something like that. Yeah. Yeah, that's right. And, you know, obviously they have big environmental impact. They have big water impact and so forth. But, you know, as we said at the beginning, copper is once again front and center. The price is back on the rise. We're back talking about this long term structural mismatch, et cetera.

4:14And so I think it's time to sort of delve deeper into this question and like see where the math is today, so to speak. Yeah, I have the Ghostbusters theme in my head. And it's like whenever you want to talk about copper, who are you going to call this guy? We're going to talk to Jeff Curry. So we've had him on the podcast at least a couple of times before. Back in 2021, we talked to him and he talked about this idea of like a new commodity super cycle. But of course, oil was surging and all these commodities were surging as the global economy was reopening. Then we talked to him again in 2022.

4:46And he said that Hopper specifically may end up being one of the tightest commodity markets he's ever seen. So real issues with supply and again, looking pretty good these days. So we are back with Jeff Curry, who is now in a new role. So when we talked to him before, he was the head of commodities research at Goldman Sachs. But today he is the chief strategy officer of energy pathways at the Carlisle Group. So, Jeff, thank you so much for coming back on Odd Lots. Great. It's a pleasure to be here. And hey, copper 10 ,000 and Odd Lots, here I come. So let's go. There's our headline right there.

5:24So, Jeff, why don't you talk to us about the last few years? It's been like over two years since we've talked to you. So what's happened in copper world or commodity world over that time? Well, let's go back and lay out the super cycle thesis that we put forth back in. It was October of 2020. The bottom line is the story is more compelling today than it was then. So you really have to ask what went wrong. So let's start with the story and then let's go to what went wrong over the last 12 to 18 months. So if we go back and review the story, there were structural supply constraints, which we called the revenge of the old economy.

6:03Put bluntly, poor returns in the old economy saw capital redirected to the new economy, starving the old economy of the investment it needed to grow the supply base. Pretty straightforward story. Still is a story in markets like copper, even oil to a lesser extent, but it's pretty much apparent across the old economy. So structural supply story, very much intact. What about demand? If anything, the structural demand stories have been turbocharged. Let's go and review the three big policy initiatives we saw driving demand. The way we talked about them back then was redlining commodity demand, RED.

6:46They are standard for redistribution policies. Basically, as lower income groups consumed with higher wages, higher income, they consume a greater share of commodities than the higher income groups. That's very much alive and kicking. You look at the low unemployment rate. Who's the biggest benefactor of that? It is the lower income groups. And, you know, policy is still very much in play all over the world right now, reinforcing these lower income groups in the consumption of commodities. So you had R, and then you had E, the environmental policy. Turbocharged from the last time we talked. You have the IRA, the repower EU, China.

7:29Part of the reason why coppers rallied recently, China's growth was over 100 % in green capex last year, 30 % this year. So everywhere you look in the world, we see environmental policy through green capex stimulating demand for commodities. And then the third one, which was the D, the deglobalization. Again, that's far greater than we ever thought. Look at the potential military spin in the US,$95 billion on munitions. We look at what's going on in places like Germany,$100 billion of military spin. So you've got all three going much stronger than what we would have thought two to three years ago.

8:10So what went wrong? I want to first start with the disinflation story. And then I want to finish by talking about the dollar. The dollar has been a big headwind to commodities. When we think about the disinflation that occurred late last year and the early part of this year, one thing to keep in mind is that it was globally correlated. It occurred against a backdrop of record commodity demand and incredibly strong GDP growth in U.S. and even China was plus 5%. So what does that tell you? Was it demand-driven weakness in prices or was it supply-driven? It tells you it had to be supply-driven. It's the only thing that could give you that pattern of observations.

8:52So if it's supply-driven, where did they get the supply? I would argue it was through regulatory easing, whether if it was on sanctions, allowing sanctioned oil to flow more freely, particularly in places like U.S., Iran, And Venezuelan, obviously that had a cost with Iranian hoodies or even the Venezuelans attacking Guyana. But that was a source of supply. The other source of supply was turning a blind eye to environmental policy around the world. We have record coal production out of China, Indonesia, and India. Actually, that increase in coal production was bigger than Saudi Arabia. It backed up gas prices and power prices around the world.

9:34We saw cutting down mangroves in Malaysia or deforestation for more food in places like Latin America. And then the third one, regulatory easing, was through immigration. So you got more energy, more food, and you had more labor, which helped create the disinflationary pressures that we saw the last several years. I'm not going to say it's the only cause, but it put a big headwind to the commodity story. And by the way, that's going to run its course, particularly after the election, because you look at, you know, the clamping down on Iranian sanctions 180 days from now. Surprise, surprise. That's after the November election.

10:13Now, let's turn and let's talk about the dollar. That's the other big headwind here. Historically, when commodity prices would rise, you would have places like Saudi Arabia become long U.S. dollars. They would recycle those dollars into U.S. treasuries. Interest rates would go down as they bought treasuries. This would create a weaker dollar that would reinforce higher reflation. If we called it the three R's, it'd start with re-leveraging in China. So you get growth outside of the U.S. And then you would have convergence in global growth. And then you would have the purchases and the stronger growth in the emerging markets by U.S.

10:54treasuries. And that would create the weaker dollar and hence the reflation. and you were in a virtuous loop. That's how we went to$147 oil in the 2000s. And the same thing happened in the 70s. For the first time ever, that dollar recycling is not occurring. And what is replacing it? I like to call it gold recycling. It explains a lot why gold prices are as strong as they are. And what is the evidence of that? Is that the emerging markets, the BRIC countries all met with Saudi Arabia and other key participants November of last year and discuss how they're going to trade with one another using local currencies.

11:31And then whatever it nets out and settling, they would settle in gold. So you've taken out that dollar recycling. China's not doing it. And think about why would they do it with everything they've seen with Russia over the course of the last several years? So that's an important difference here. It doesn't mean it's a very super cycle, but you're unlikely to see that dollar recycling playing out probably ever again, which means that what do they do with this? If they're buying physical goods like gold, they could be buying things like oil, copper, and other commodities as we look forward. So those are the two big headwinds why I'd argue we're wrong, but the fundamental story still very much intact, particularly with copper.

12:09Jeff, that was an amazing overview. I'm just going to say for our listeners that we are talking to Jeff from his office in London. There's a little bit of a sound quality issue. Obviously, we need more transatlantic copper cables running under the ocean. Well done, Tracy. Thank you. That was a good seg, right? All right. I have a very important question for Jeff, which is, are you wearing a copper bracelet right now? Absolutely. It is the most compelling trade I have ever seen in my 30 plus years of doing this. You look at the demand story. It's got green CapEx. It's got AI. Remember, AI can't happen without the energy demand.

12:50And the constraint on the electricity grid is going to be copper. And then you have the military demand. So unprecedented demand growth against unprecedented weakness in supply growth, because we have not been investing. It's teed you up for what I would argue is the most bullish commodity that I actually I just quote many of our clients and other market participants say, you know, it's the highest conviction trade they've ever seen.

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15:09Earlier, you were talking about the sort of general commodities super cycle and why that didn't necessarily play out in the time frame that we initially thought it would. But can you dig a little bit more into copper? Because this is something that I see over and over again. We talk to a lot of commodities experts on the show. Everyone seems to have a high conviction on the copper trade or at a minimum see lots of upside potential. Why didn't that play out in the sort of immediate post-pandemic years? Because investors were unwilling to take on blind faith that China property market could sink and you could still be long copper and other base metals.

15:52Because for as long as many of these people had been trading commodities without China, you could not be bullish. And what happened in 22 and 23 was the Chinese property market started to sink and sink very quickly. And that discouraged investors to get long. And I think they have now seen enough evidence last year and And this year, for example, copper demand so far this year is up 6 % year over year, despite an incredibly weak property market in China. So I think what has shifted here is confidence from investors in metals that you can buy these markets based upon the green CapEx story, despite a weak China property story.

16:35I think that's what has really changed in the last, let's say, 6 to 18 months. Let's talk more about the long-term supply outlook. So the basics, yes, it takes a really long time to get a new copper mine online. Maybe it takes even longer than in the past due to local opposition and concerns about the environmental impact. What's happened in terms of planned new mines over the last three years? Are there new projects that are breaking ground or at least pencils down yet that we hadn't seen in 2021? What's happening in the planning cycle? You don't have to look any further than the Anglo-American bids.

17:12BHP finds it cheaper to buy Anglo-American than putting a drill into the ground. And that's pretty much been the case across the board is that they're finding ways to increase supply, particularly through M &A activity, as opposed to having to do it through organic, let's call it greenfield investment. When we look at the commodity super cycle in the 2000s, how did it start off? It started off with the creation of BHP Rio. Then you had ExxonMobil, BP Shell. All the super majors were all created, both in metals and energy at the beginning of that super cycle, because it was easier to consolidate to grow your supply than it was to do it through greenfield investment.

17:57And so because we observe that going on, it tells you we're not at the point right now where people are willing to make greenfield investments because they can buy other companies more cheaply. Which means prices have got to go higher and the conviction has got to be greater before you start to see that substantial rise in greenfield investment. So one thing I wanted to ask is what is the impact of price on investment here? This is a kind of a weird question, but like, does it actually make much of a difference if copper prices start rallying? If we do see another record in the price per ton, would you expect to see an investment response of some sort?

18:35Eventually. Eventually. Yeah. Even if it's on a longer term timescale. Yes, eventually you should. We saw it in the 2000s. Let's review what happened in the 2000s because I think it's pretty instructive to right now. That super cycle lasted 12 years from basically 2002 to around 2013 or 2014. And the super cycle in the 70s basically lasted 68 to 80. Again, 12 years. Why the 12 years? Years one through three are usually higher prices, creates a confidence that, hey, this is real. We're three years into this and the confidence is so-so. You know, the diehards that I talk to have a lot of confidence, which means you probably need more higher prices before people become convicted that it's actually for real.

19:22What creates the second big uptick in prices? Because once these companies start to spin, then you get cost inflation. And that drives you up to the next level. And if you look at what happened with copper in the 2000s, it went from, let's say,$2 ,000 a ton to$4 ,000 a ton over that first three years. And then around 06 through 08, it exploded to$8 ,000 a ton because that's when they started to spend. But they had to achieve that confidence that still is not apparent in this market. And then let's say the final five to six years is finally when you begin to de-bottleneck the system and the investment plays out.

20:03And it takes another, let's say, seven years and you get actual supply. So where are we in that process? or still in that first three years, creating conviction around, is this for real? Our estimates, you need to be above$9 ,000,$10 ,000 a ton before people really start to be confident that they can make this kind of investment. And I think the other thing, too, is not only does their prices have to reach those levels where the break-evens begin to happen, but they got to go above to create some type of confidence that they have some type of cushion, which means, well, we likely see much higher prices before you start to see that supply response.

20:40I have a very oddball question, but I've been wanting to ask this question to someone who knows for a long time. It's a very brief story. Sometimes I take Ubers to work. I haven't in a while, but I used to sometimes take Ubers to work. And when the driver sees I'm working for Bloomberg, they want to bring up something finance. And usually it's like, oh, what do you think about like Dogecoin or Bitcoin or something like that? But one time I had an Uber driver. He's like, I'm really, you know, you're talking about gold. He said, I'm really bullish silver because I believe there's not enough copper mining going on in the world.

21:12And silver is often a byproduct of copper mining. And there's a lot of silver content and some of this EV stuff, particularly solar panels, he said. And therefore, there's going to be a shortage of silver. And I know this is like a little diversion, but I just had to get this off my head because we're here talking to Jeff Curry. What do you think about my Uber driver's thesis? I like that you're asking questions on behalf of your Uber driver. Yeah. And I still have his context. I still have his context. So two years later, I'm finally going to get a chance to get back to him on this. What do you think about my Uber driver's silver thesis?

21:44I definitely think there's legitimate arguments behind his solar thesis. And it's one of the arguments we put forth for prices moving higher. But the one thing that we watched, particularly back in, it was in March, April of 2021 when everybody, it was actually during that GameStop era when people were going to move and they were going to try to short squeeze silver. The problem with silver is there's just too much of the stuff around. There's millennia of production sitting above ground like gold, but unlike gold, it is not as rare, so it's more plentiful. So I think, yeah, it will behave similar to what he said, but I'm never going to be jumping on the super bullish bandwagon on silver just because of the fact that there's just so much of it around the world and it's not nearly as rare as something like gold.

22:35Yeah, even I have a bunch of silver. I think we've talked about this before. My dad keeps giving me silver coins from his collection for my birthday and for Christmas. And so I'm expanding this collection of silver coins to the point where I think I could successfully have one of those silver stacking channels on YouTube at this point. That would be fun. Jeff, there's one other thing I wanted to ask you. So, you know, we're talking about like the price of copper, the futures price, I wanted to ask you about the copper concentrates market and get into like a little bit of the discrepancy between like maybe the financialized price versus the physical price.

23:14Can you walk us through what's been happening there? Because in some respects, like this is where the immediate shortage is playing out, even if it hasn't been reflected up until recently in the overall futures price? Very good question, Tracy. You know, when we think about metals, the ore that comes out of the mine, that typically gets turned into concentrate and shipped, you know, somewhere around the world where it basically has to be smelted into, you know, a refined type of hopper that can be used and sent on into, you know, markets like wiring and so forth. But it's there where you saw the very first signs of a shortage.

23:53Actually, it was in SK in Korea, where there was not enough concentrate to go around to be able to smelt into something that was more useful. And so, it's called the TC charges, the concentrate charges. And right now, everybody's, oh, they're negative, which is telling you the shortage is at the mine in that concentrate, not at the in-use consumer yet. It's going to work its way down there. By the way, it's the same thing happens in refining margins. When you have a real big shortage in oil, it crushes the refining margins. And so the fact that you have zero or negative TC charges right now is an indication that you have shortages at the mine, which says eventually this is going to work further downstream, which as we look out further, particularly towards the end of the year, we'd expect those shortages to work further downstream, more towards the consumer and away from the mine.

24:49But absolutely, I think that's a critical, and it was about two or three weeks ago one morning I was looking at the Koreans and go, wow, here we are, finally, physical shortages happening at the concentrate level, which is telling you just a matter of time before we see it at the in-use consumer level. So Jeff, I just want to nail you down on the price target for copper and the timeframe, just so that when we have you back on in a year or two, We know exactly what our priors were and what our expectations were for the move. But where do you see copper going from here? Where's the sort of upside risk and what time frame are we talking about?

25:26You know, our view over, you know, call it a two to three year horizon is it's got to reach somewhere around$15 ,000 a ton. Where do we get the$15 ,000 a ton? is you go back to 1968, the beginning of that super cycle, and it was a big housing boom driven by the war on poverty through the great society. We saw copper prices reach the equivalent of$15 ,000 a ton. We know that demand destruction occurred. Now, we'd never had another opportunity other than that time period to observe demand destruction. Because that's basically, you know, at the in-use consumer level, you're out of supply like that Korean concentrate situation, you ran out of supply, you're short, and now you have to get the in-use consumer to ration their demand out.

26:13That's how you find out how high these commodity prices can go. And that$15 ,000 a ton was saying, okay, the only time in history we've observed actual physical demand destruction or rationing of physical supplies was that time period. Whether or not that holds in the current environment, We'll find out. But that's our best guess of where prices could go because we've seen it before. How long does it take to get to that dynamic? I thought we would have been to that dynamic by now. I would tend to think if we meet back up in the next 12 to 18 months, there's a probability that we're looking at prices in that$12 ,500 to$15 ,000 range.