Neuberger Berman
Copper May Soon Be In Short Supply
By Hakan Kaya, Senior Portfolio Manager at Neuberger Berman
Copper appears a cornerstone of the green-technology revolution. With global supply constrained, we think prices could soon be on the rise.
Hakan Kaya, Senior Portfolio Manager, will be discussing in the Alternatives Breakout Session how copper, a linchpin of the green energy revolution, appears to face a looming supply-demand imbalance that, in our view, could soon shine up the metal’s market price.
On the demand side, government initiatives—such as the U.S. Inflation Reduction Act, RePower Europe, and “net-zero” commitments around the globe—are turbocharging the need for copper, which is a crucial component in everything from electric vehicles to solar photovoltaic plants. As the transition to clean energy accelerates, we expect copper demand to grow exponentially, helped along by the global “green space race.” For example, when China offered subsidies for building battery plants (a strategically important initiative), the U.S. and EU followed suit. We think that sort of global one-upmanship could drive even further demand in years to come.
Figure 1: The Green Revolution’s Demand For Copper Could Soon Outstrip Supply
As for supply, yields from gradually exhausted mines have been declining for decades, while new-mine construction confronts long-cycle risks (it takes 10-12 years to open a new mine), and general underinvestment due to historically poor returns. Copper supplies are also geologically concentrated across a few countries, potentially restricting supply. Essentially, copper could become “the new oil”.
Source: Wood Mackenzie. Data as at 23 March 2021.
Figure 1 tells the tale. During calendar year 2020, the world produced 20 million metric tons of copper. At that “base case capability” (meaning no new mines are built), production is expected to fall roughly 8 million metric tons by 2040 as existing mines gradually exhaust; meanwhile, baseline demand is expected to climb by 9 million tons.
That supply-demand mismatch could widen further along the way, depending on the price of copper and the trajectory of the global green-energy transition (see the dotted “accelerated energy transition demand” line on figure 1). While higher prices could incentivize new mine development, the shift toward electric vehicles, renewable power and other clean technologies could propel annual copper demand even further.
Recycling may provide some supply relief—however, it is a very expensive process and we believe copper prices would need to rise to compensate for the effort. Substitution doesn’t appear a viable option, either: Unlike other metals, copper boasts a unique combination of ductility and conductivity, making it ideal for a host of applications, including batteries, wiring, electrical grids and more.
All factors considered, by how much might copper prices rise?
For historical context, consider China’s rapid development during the early 2000s. During that period, rising prices for energy commodities and industrial metals sent the Bloomberg Commodity Industrial Metals subindex soaring more than 400% until the Great Financial Crisis arrived in 2008. In our view, total capital outlays to support the green revolution could exceed twice China’s demand for metals during its heyday—making a good case, in our view, that the Metals subindex could surpass its huge runup during the aughts.
In even more tangible terms, consider that the Escondida mine in northern Chile—the largest copper mine in the world—produces around 1 million tons of copper per year. To meet demand implied by current 2050 global net-zero goals, we estimate the world will need one new Escondida mine every year through 2030.
In our view, commodity investors might be wise to buy what’s in short supply. The value of a commodity is directly related to its scarcity rather than its production. An active approach allows investors to benefit from this counterintuitive risk dynamic, while passive investments follow production weightings and could lead to risk concentration.
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We believe global structural shifts like the transition to carbon neutrality support the long-term strategic positioning in commodities. As we complete this transition, many commodities will become scarcer and become more valuable, making the case for a broader allocation. We invest with a fully diversified broad-based approach to capitalise on the breadth of opportunities.
Neuberger Berman has managed diversified commodities since May 2010 using a scarcity and risk-aware approach that seeks to encompass both current and future scarcity at a reasonable risk. The team has established an attractive track record with their rigorous process and high-quality research. The Neuberger Berman Commodities Fund was launched in 2022 and could be suited to investors looking to tap into global growth trends and hedge against inflation or diversify risk. The investment team utilise unique data sources and analytics for enhanced insights, seeking to provide an attractive level of return investing across various commodity sectors via commodity-related derivative instruments.
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