The latest case for copper … are recession fears overblown? … revisiting the supply/demand imbalance … how to play it

Monday and Tuesday saw huge market gains thanks to the budding narrative that that deteriorating global economic conditions will soon force the Fed to ease up on interest rate hikes.

The market is giving back some of those gains as I write on Wednesday, but that doesn’t mean this “Fed Pivot” narrative won’t come roaring back.

If we are, in fact, witnessing the beginning of the Fed Pivot, then the coming months will bring a significant slowdown in rate hikes, if not a plateauing or reversal of rates.

Such a pivot would take the wind out of the sails of the U.S. dollar, which has been on an unrelenting move higher since summer 2021.

So, what are the investment implications of a weakening dollar?

Well, regular Digest readers will likely conclude “good for U.S. multinationals” (think Nike, Coca Cola, McDonald’s, IBM, and so on).

This is true – here in the Digest, we’ve highlighted the pain that multinationals are feeling courtesy of the strengthening dollar. So, a weakening dollar would relieve their currency headaches.

However, a weakening dollar also will greatly benefit another asset class that many investors have left for dead. They’ve turned their backs on this asset due to the belief that a global recession will kneecap demand.

But if you truly believe we’re on the verge of a Fed Pivot, you’re going to want this asset in your portfolio.

That’s because this asset enjoys multiple tailwinds: a globally popular political narrative… relentless demand from the technology sector… and a growing imbalance between supply and demand…

And a dovish Fed Pivot that takes the air out of the dollar would likely be the spark that ignites a new, massive bull run.

Best of all, if hopes of a near-term Fed Pivot fizzle out, and it doesn’t happen until well into 2023, this investment still has legs. The inevitable surge would only be delayed.

Today, let’s turn to our macro specialist Eric Fry and revisit the investment case for battery metals – in particular, copper.

This is a no-brainer long-term investment. The only thing that’s changed over the last year is that prices have become more attractive.

Let’s jump in.

Why “copper is the new oil”

Regular Digest readers know that we’re incredibly bullish on copper’s mega-growth story. Much of our enthusiasm is due to Eric’s research in The Speculator.

As Eric has pointed out, we can’t have the green future that global politicians want without batteries, which are hugely reliant on copper:

The average EV uses almost half as much copper as the average American house, and EVs aren’t the only “green” products that are “metal hogs.”

• Wind energy uses five to 10 times more copper per unit of electrical energy than does the conventional burning of coal
• Photovoltaic solar power uses six times more copper per unit of electrical energy.
• A Tesla Model 3 requires 240 pounds of copper, which is nearly four times what a midsized internal combustion vehicle requires.

Therefore, as the renewable energy boom gains momentum, it will produce an echo-boom in demand for key battery metals.

Earlier this year, we highlighted research from Goldman Sachs’ Chief Commodity Strategist, Jeff Currie. He’s on the same page as Eric.

In an interview on CNBC, Currie discussed the huge opportunity in copper:

The metals are the primary beneficiary of this super-cycle… And the reason why is the green cap-ex story.

You have every country in the world pursuing the exact same policies at the exact same time. And there’s no way you’re going to decarbonize the world without copper.

Copper is the strategically most important commodity out there. We like to say “copper is the new oil.”

Inventories are dropping like a brick. Inadequate supply already. And we haven’t even started to decarbonize the world.

Copper is the one that really benefits from that story.

Be that as it may, copper has run into a huge brick wall in 2022…

The threat of a global recession.

The worry is that if the world falls into a recession, beleaguered economies won’t require as much copper because shrinking economic activity will slow demand and manufacturing.

So, these recession fears, combined with unrelenting dollar strength has dragged copper’s price down.

Where does that leave us?

Do lower prices mean it’s a good time to buy copper assets today, or is this a bear trap?

The risks to copper demand from a global recession are highly overrated

Last week, Eric recommended a new copper investment for his Speculator subscribers. As part of his recommendation, he tackled this “what about a global recession?” objection head-on.

From Eric’s Trade Alert:

[Today, there’s] the narrative that a global economic slowdown will destroy demand.

Whether the topic is copper or crude oil, lumber or lean hogs, most economic prognosticators are certain that demand will implode for all of it.

I disagree with that dire forecast.

Yes, demand is falling for many goods and services, and will continue to fall for many of them, but not all of them.

Copper demand, for example, has been flat-lining for the last few months, but it is certainly not imploding.

For specific insight, consider China, which consumes more than half the world’s copper every year…

Eric notes that China’s monthly copper imports have held steady around the 500,000-tonne level over the last several months. This is roughly 20% higher than pre-COVID levels. And this has happened during a fresh round of Covid-19 lockdowns.

Now, let’s add another important variable to the equation – supply

Even if demand drops substantially due to a global recession, there still isn’t enough copper supply available to meet demand (even if it’s reduced demand). That will boost price.

So, what’s the status of global copper inventories these days?

Back to Eric:

…Physical stocks of copper in China have tumbled to 13-year lows.

Copper stockpiles are also falling in the Western world. As a result, the combined copper stockpiles of the major commodity exchanges in Shanghai, London, and New York have dropped to an 18-year low.

If global copper demand were actually as weak as advertised, stockpiles would not be falling to multi-year lows.

This echoes the sentiment of Freeport-McMoRan’s CEO Richard Adkerson earlier this summer during Freeport’s Q2 earnings call (Freeport is a copper mining giant):

There has been, to date, no significant impact in physical demand (for copper). Today’s market is tight.

What that means is that much of copper’s selloff has been based on fears of the future, not necessarily fundamentals of the present.

Okay, but let’s push back. What about bearish articles with terrifying headlines, such as this recent one from Reuters:

“Grim demand outlook pushes copper prices to 2-month low”

Well, are you looking at copper as a shorter-term trade or a longer-term investment?

Evaluating copper through different timeframes

Copper’s price could continue to come under pressure in the coming months. That’s a reality we won’t contest.

There are the potential headwinds of the global recession… possible new Covid-19 lockdowns in the winter… reduced funding flowing to green initiatives…

But for investors who are looking bigger picture with a multi-year timeframe, you’d be hard-pressed to find a more bullish set-up.

Back to Eric:

According to research firm Fitch Solutions, annual global copper use will soar from 24 million tonnes to nearly 32 million tonnes over the coming decade, thanks mostly to surging demand from EV manufacturers and other renewable energy industries.

By 2030, Fitch predicts, copper demand from green technologies will more than triple to five million tonnes per year.

For perspective, five tonnes of yearly copper demand would be greater than the combined yearly output from the world’s three largest copper mines!

Eric goes on to highlight a study from research firm, CRU Group. It found that the copper industry needs to invest more than $100 billion to have any chance of preventing major supply deficits during the upcoming decade.

A report from S&P Global earlier this year forecasts that the volumes of copper needed for EVs, wind, solar and batteries will triple by the middle of the next decade.

But let’s come full-circle to copper’s price. Here’s Eric’s take for what’s on the way:

Certainly, the copper price might drift a bit lower, but it probably won’t hang around these levels for long; the supply-demand dynamics in the copper market continue to point to higher prices.

So, how can you play copper?

A copper investment that we’ve profiled here in the Digest is COPX, which is the Global X Copper Miners ETF. It holds a basket of the world’s top copper miners. As the price of copper rises, these miners benefit.

As you can see below, COPX performed wonderfully earlier this year when all eyes were exclusively on inflation. But as the focus has shifted toward a global recession, COPX has sold off substantially.

The ETF is down about 12% over the last year, slightly better than the S&P’s -14% performance over the same period.

While COPX is a convenient way to play copper, it’s not necessarily the most explosive way. That’s because your returns are a blend of many different copper plays, some not as great as others.

If you want concentrated firepower, I’d encourage you to check Eric’s Speculator newsletter to learn more about the specific company he just recommended. I should point out that one of the last times Eric played copper, his subscribers walked away with a 1,000% return.

Bottom line: If you’re looking for a long-term buy-and-hold investment with massive upside, this is it. We simply cannot have tomorrow’s mindboggling technologies without copper. And that makes us about as bullish as possible for the long-term investment case.

Here’s Eric to take us out:

The copper market is setting the table for a powerful new upswing. As that upswing materializes, [the earnings of top-tier copper miners] will soar anew – probably to levels that are well above what most analysts are currently expecting.

Because of near-term anxieties about recession, many investors are ignoring the powerful long-term demand trends for batteries that remain in place.

The year-long stock market selloff has provided a brand-new opportunity to capitalize on this trend.

Have a good evening,

Jeff Remsburg