The world is going to need a lot more copper to power everything from electric vehicles to updated grids and datacenters. At the same time, getting new mines online is an extremely slow process, one that’s made all the more difficult by political and environmental concerns.
The mismatch between rapidly-growing demand and sluggish supply has already helped push copper prices to more than $10,000 a ton in London trading this week.
But according to commodities veteran Jeff Currie, the metal still has more room to run. In a new episode of the Odd Lots podcast, the chief strategy officer of the energy pathways team at Carlyle Group Inc, says long copper represents “the most compelling trade I have ever seen in my 30-plus years of doing this.”
Currie, who was the longtime global head of commodities research at Goldman Sachs Group Inc. before joining Carlyle last year, has been banging the proverbial copper drum for a long time. He uses the acronym “RED” to summarize the three big structural tailwinds driving more demand.
The ‘R’ stands for redistribution policies: As he argues, lower-income groups have been consuming “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 policies still very much in play all over the world right now reinforcing these lower-income groups in the consumption of commodities.”
The ‘E’ stands for environment policy, which Currie describes as having been “turbocharged” in recent years.
“You have the IRA, the REPowerEU, China,” he says. “Now, part of the reason why copper’s rallied recently [is that] 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 finally, the ‘D’ stands for deglobilization, though it could also stand for defense.
“Look at the potential military spend in the US — $95 billion on munitions,” he says. “We look at what’s going on in places like Germany, $100 billion dollars of military spend. So you’ve got all three going much stronger than what we would’ve thought two-to-three years ago.”
Of course, even at more than $10,000 per ton, we’re still not quite back to the peaks that the metal made in early 2022. Currie says that since that time, global commodity markets generally have seen a stealth easing, with policymakers looking the other way on enforcement of sanctions and environmental regulation.
Oil has flown more freely from places like Iran and Venezuela. Meanwhile, China, Indonesia, and India have ramped up coal production. And the return of global migration flows have eased the labor part of the story.
“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,” Currie says. “I’m not going to say it’s the only cause, but it put a big headwind to the commodity story.”
Currie also sees a key difference between the current commodities rally and those of the past. This one has to do with the changing nature of so-called petrodollars, with major commodity producers no longer automatically recycling their dollar-denominated oil revenues back into US Treasuries. In his telling, this recycling in the past would push interest rates lower, thus weakening the dollar, and therefore putting more upward pressure on commodity prices.
Now, we see a different loop.
“For the first time ever, that dollar recycling is not occurring. And what is replacing it? I like to call it gold recycling,” says Currie. “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 [in] November of last year, and discussed how they’re going to trade with one another using local currencies. And then whatever it nets out in settling, they would settle in gold.”
Currie also believes that part of the mediocre copper performance over the last two years can be attributed to investors’ collective focus on the crash in Chinese real estate, which made them uncomfortable getting long in that environment.
In the meantime, the higher prices we’ve seen so far, and the rising awareness of the “RED” thesis, haven’t yet elicited much response on the supply side of things.
Currie points to BHP Group’s ongoing attempt to purchase Anglo American Plc as evidence that the big players are more interested in growing through consolidation rather than through investment.
“You know, BHP 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,” Currie says.
Companies are, he says, “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.”
And so, the current environment is playing out similarly to the 2000s. While at some point there will be a supply response, it’s going to take some time. And, just like two decades ago, the M&A cycle always comes first.
“When we look at, you know, the commodity supercycle in the 2000s, how did it start off? It started off with the creation of BHP-Rio. You know, then you had ExxonMobil,” he says. “All the super majors were all created both in metals and energy at the beginning of that supercycle because it was easier to consolidate, to grow your supply than it was to do it through greenfield investment.”
Eventually, copper prices will rise to a point where M&A alone isn’t the solution, says Currie.
“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.”