The asset powering the EV trend … a massive imbalance in supply and demand … why Eric Fry isn’t worried about recent price softness … how to invest
One of the biggest investment stories of the next two decades will be electric vehicles (EV). They’re the future of day-to-day transportation.As evidence, take California. Last year, California politicians passed a law that bans the sale of new gas-powered cars by 2035. We’re going to see additional states pass similar legislation in the coming years.On that note, here’s Kelley Blue Book:
States have begun following California’s lead in banning sales of new gasoline-powered cars by 2035. Both Massachusetts and Washington have so-called trigger laws requiring their states to ban the sales if California does…Other states often follow California’s lead. Seventeen states, representing about a third of car sales, have adopted some version of California’s stricter pollution regulations in the past.Colorado, Connecticut, Delaware, Maine, Maryland, New Jersey, New Mexico, New York, Nevada, Oregon, Pennsylvania, Rhode Island, Virginia, Vermont, and Washington, D.C. follow California’s pre-ban car emissions rules.
So, we know that EV adoption is going to rise – that’s inevitable.But how do you play it from an investment angle?Investing in the EV manufacturers is the obvious first choice. But there are all sorts of challenges with this approach – enormous capital expenditures, cutthroat competition, vulnerability to supply chain problems, and of course, the risk of all sorts of company-specific issues.Given these challenges, regular Digest readers know that we’ve preferred a different way to play the EV megatrend – copper.Much of our enthusiasm is due to research put together by our macro specialist, Eric Fry, editor of Investment Report .As Eric has pointed out, we can’t have a green future with EVs in every driveway (and amazing new technologies in every home) 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.
From an investment perspective, the correlation between copper’s price and EV stocks has been striking in recent quarters
To illustrate, below, we look at the price of copper alongside the ETF, IDRV, which is the iShares Self-Driving EV & Tech ETF. It holds EV heavyweights including Lucid, Volkswagen, Porsche, Tesla, and Rivian among other manufacturers and related tech companies.Here’s copper in black, and IDRV in green, over the last 12 months. The correlation is remarkable.
Now, let’s be honest…This correlation hasn’t been good for a copper investment recently. So, why, exactly, is this corner of the market deserving of your investment dollars?
Investors need to maintain a longer-term perspective, and a focus on the macro issues that will impact copper’s supply/demand for decades
To begin unpacking this, let’s return to Eric discussing the difference between copper’s recent price weakness and copper’s industrial demand:
Copper prices hit an all-time high of $4.94 last March, but have backtracked about $1.00 since then. Even so, the price of copper does not at all indicate that demand has slowed.As I said in a recent issue of Investment Report…“’Demand destruction’ is a term that’s receiving a lot of airplay these days.According to the popular narrative, the U.S. recession will become so acute that it will destroy demand for everything from gasoline to golf balls… and fertilizer to footwear.But nutrients are not Nikes.Even if a recession causes consumers to cut back on sneaker purchases, it does not follow that farmers will cut back on crop nutrients – aka fertilizers.Nor does it follow that slowing demand for Titleists would signal slowing demand for titanium… or aluminum… or copper… or any of the other metals that are feeding the global renewable energy boom.The ‘demand-destruction’ narrative has become so extreme that it borders on absurdity.Yes, recessionary conditions can slow the growth of demand for various goods and services, or even take a bite out of that demand. But they don’t typically destroy demand like a wrecking ball destroys a condemned building.”That pretty much sums it up; while prices may be struggling under the weight of a year-long bear market, demand has not ceased – and it will not.
Eric illustrates this by pointing toward the Canadian metals mining firm, Teck Resources Ltd. (TECK). It predicts copper demand for EV battery production will jump 750% this decade. Teck also predicts copper demand for EV charging stations will soar more than 1,000% by 2030.Now, that’s a good start for the copper investment narrative, but here’s where the bull thesis enjoys a major shot in the arm…
While copper demand will be skyrocketing thanks to surging EV adoption, copper supplies will be dwindling
Back to Eric:
The copper supply is under extreme geological pressure; ore grades at the world’s major copper mines are declining.Australian-U.K. resources company BHP Group (BHP) estimates that declining grades will remove around two million tons/year of global copper mine supply by 2030.That’s no small matter. As ore grades decline, copper supplies do not merely become less plentiful; they also become more expensive to extract.
Now, let’s factor in the estimated adoption curve of the EV market.From S&P Global:
Despite the several risks for EV sales growth in 2023, the long-term shift away from internal combustion engine vehicles remain unaffected.S&P Global Mobility projects that the share of battery electric vehicles, plug-in hybrid electric vehicles and fuel-cell electric vehicles in new light vehicle sales in Europe, mainland China and the US will rise to 70%, 49%, and 47% in 2030, respectively, from an estimated 19%, 18% and 8% in 2022.
That’s enormous growth – 3.6X from Europe… 2.7X from China… and nearly 6X from the U.S.And it will be happening as copper supply grows scarcer.Think back to Econ 101. What happens when demand outpaces supply?We get a price explosion.Plus, this doesn’t even touch demand from the countless other industries that require copper (building construction, handheld electronics, industrial machinery, consumer goods, to name a few…)Back to Eric:
Bottom line: Robust future demand growth for copper is fairly certain, but the mining industry’s capacity to satisfy that growth is not.That’s the sort of equation that should put upward pressure on the copper price for many years to come.And as the electric vehicle rollout continues, you can bet that the “picks and shovels” plays – the suppliers for the automakers – have the potential to soar higher than even the automakers themselves.
How do you play it?
In past Digests, we’ve highlighted the Global X Copper Miners ETF (COPX) to play copper. It holds miners including Freeport-McMoRan, Antofagasta, BHP Group, and Ivanhoe.Eric has recommended COPX in the past as well. His official trades have profited to the tune of 100% and 85% respectively (he sold in tranches).But below, you can see COPX has been largely range-bound since 2021.
While this has been frustrating, ask yourself…Given the exploding EV demand that’s coming, combined with the shrinking copper supply, what’s the most likely impact on price?From that perspective, investors should be excited about any short-term influences that push down copper’s price. It’s simply a lower entry point on a multi-decade growth story.If you’d like more of Eric’s research on EVs and battery metals, as well the specific investments he’s picked to play EVs and copper, click here. Right now, he has his eye on a supplier that he’s confident will be a big beneficiary of this revolution.In any case, make sure copper is on your radar. It’s headed higher.
Have a good evening,
Jeff Remsburg
