Metals for the Win?

Our increasing demand on industrial metals will prove to be challenging to supply, but what metal will win the race to sustainability?  Just how much will inventory drive the price of the metals needed for electric vehicles, solar and wind energy and upgrades to the electricity grids?







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Transcript

Metals for the Win?
Season 3: Episode 2

Katz: Welcome to The Real Spiel with Ryan and Kurt. Just wanted to talk to you guys about metals. We've seen a run-up in commodities in 2022. But metal had kind of struggled sideways for the back half of the year. And Kurt, my question to you would be is this because of fundamentals in the metals or commodity markets. It's or is this being driven more broadly by macro-economic conditions. 

Nelson: Hey Ryan, I think it's more the latter. I think we had some pretty extraordinary changes to the economic environment in the last say eighteen months. We got used to interest rates of zero for ten years. That's you know, having interest rates at zero in the United States is weird. Having it at zero for a decade is incredibly strange. But we get used to it and interest rates now are, you know, four and a half percent or so? And I think there's considerable fear along with the inversion of interest rates in the bond market. And this persistent, hawkish policy from the fed, which I don't think is unsound that we're seeing fears about a recession. So industrial commodities, energy sector, Industrial metals, you know, often react negatively in the short-term to the idea of a GDP, slowdown, and recession. So, I think that's one of the things that factored into the second half of ’22 returned. But I think if you peel the onion a little bit more, what's really fascinating is how inventories at the Shanghai exchange, at the London metal exchange warehouses, at the US COMEX exchange warehouses, there at historic lows right now. And this, you know, span is the gamut of, you know, copper to aluminum to, you know, tin and lead and zinc and nickel. And it’s really kind of pan metal commodities. It's across the whole spectrum. And that setup is quite interesting, because even if we have a recession, I think there's a recession proof demand increase for these metals, particularly copper, for aluminum, for nickel and zinc, their use in batteries, renewable energy, and grid enhancements and so on. That this transformation towards an electric transportation system is inevitable. It's gonna happen in the U. S. It's going to happen in Europe. It's going to happen in Asia and is already underway with or without government support. Even at the consumer level companies are all committed to that and that's where they're gonna go. So, there's this new organic demand. The problem is inventories at these incredibly low levels mean that there's nothing to give. If there is new demand that exceeds supply. The only thing that can give is price. On the supply side of the equation Ryan, is the fact that you know, a decade of weak metals prices has led to underinvestment that the major companies like Rio, Tinto and Glencore and others have not been expanding new mines. They're not being well financed by private capital.  They are being underbanked by the Wall Street investment banks. And so, they've been playing defense for several years and we've gotten used to this efficient just in time inventory. You know, anytime you want somebody you can get it from Amazon in 24 hours. In oil and gas through fracturing in hydraulic and horizontal drilling. We have just in time inventory for oil and gas in the United States. It's an amazing phenomenon that's happened in the last decade. There is no such thing in metals. We have to spend billions of dollars and years to you know, to identify permit, site, finance and staff an operating mine that's going to extract new copper, new aluminum, etc. So, my base case expectation is that we're going to see increased demand year over year across a wide swath of industrial metals. But we're gonna see a sort of a behind the curve catch up on the supply side. For the only reason that there's no there's no shortcut that you know if we're behind in our copper production in ’23 beyond demand.  It's going to take us till ’24, ’25, ’26 to catch up. Meanwhile, demand is going to keep increasing year over year as we you know expand our EV vehicle base, as we improve our electricity grid and do other critical investments. Many of them are already prefunded by the inflation reduction act that was passed last year. So, I think there's a very interesting dynamic in the metal space, which we we've only begun to absorb. 

Katz: Yeah. Just to echo that. I mean, the new demands just in electric vehicles and charging stations and upgrading our grid for these metals is going to be massive. And then you take a look at the under supply of copper sitting at, you know, five-year lows. Definitely seems like there's a lot of tailwinds there. But also, just looking at, you know, battery inputs. You mean copper is one that stands out, and it makes a lot of headlines. But manganese, cobalt, graphite, lithium, silicone nickel. Are there any other metals markets you think that are interesting for the year ahead? 

Nelson: Yeah. Absolutely. I mean, I think lithium is very interesting, and there have been some, you know, futures that have begun to trade. They're not necessarily particularly deep or liquid yet. But they exist. Even, you know something like uranium trades on exchange and is a component in, you know, nuclear fuel. I think, we don't know today in ‘23 which battery technology is going to win. But what I can assure you is that it's going to involve primarily metals to, for the manufacture and storage of electricity. So, whether it's you know, some kind of silver process or a nickel process or cobalt or lithium, I think that maybe even iron ore, there's been, you know iron ore is now a very liquid commodity that trades in Singapore as a commodity future. I don't know what's going to be the winner. And I'm not really trying to predict the winner in advance. But what I do know. Is that all of these metals are going to be in increased demand as we, you know create, you know enhanced electric grid systems. There's something called the PJM grid that covers New England, and it's antiquated. And it has issues. We saw grid failures in Texas a year ago that were catastrophic because of the cold weather. We’ve seen, you know, energy problems in California, and so all of these need to be upgraded in addition to charging stations. As you mentioned, you know the production of electric vehicles which take two to three times as many metals as a normal combustion engine, you know, installation and production of new wind farms, of solar farms. Those are all going to be very metals intensive.  And I think they need to happen because of climate change, and you know a green environmentally friendly transformation of our energy production in the US. But metals are gonna have a long time to catch up to meet that demand. I would also say, you know another possibility is that you could see a relaxation of governmental standards, if you know the United States realizes that we're in a critical shortage of copper, we do have supplies of copper in the United States. But to extract that copper, you know, requires permitting and capital investment in labor. Even if you get either state or federal government support to expand and open new mines, you're still going to have local opposition because of the environmental impact, which can be negative. And, I just haven't seen that happen. I've seen the opposite in the last year. I've seen more opposition to new minds because of polluting groundwater, we saw a major mine in Chile get disapproved by the federal government because of concerns of its impact on the snowpack and the runoff that creates a lot of the water table and water supply for Chile. So, I think we're not there yet. And we have some significant reasons to believe that demand will increase and we're seeing ourselves pretty under supplied currently even prior to this new demand. And it's going to be very high hard for supply to respond in a short period of time even if prices increase substantially.

Katz: Right, and going back to copper just briefly, there are only two metals that are more conductive to electricity than copper. And those are gold and silver and I think it's pretty unlikely that we'll be wiring our vehicles and batteries and grid system with gold and silver anytime soon. 

Nelson: Yeah. I have, a belief that Elon Musk has a Tesla that is wired with gold wiring somewhere. But I think he's probably the only guy who can afford it. And maybe he can't afford it now. Depends on what happens with Twitter and everything else. But you're absolutely right. So, all kidding aside, you know, Gold is a fantastic conductor of electricity. Silver is good too. But copper is almost equivalent to silver and aluminum actually does okay. The problem with aluminum is that you just need, you know, a much thicker wire. It's not nearly as efficient as copper. So, you know, you don't want to have an iPhone that looks like a, you know, a concrete block in order to be able to stores and conducts electricity. It would be relatively lightweight if it's made from aluminum. But it's gonna be huge. You need copper. So there really isn't another alternate conductor of electricity for most componentry. Whether it's in advanced electronics, or it's in things like transportation vehicles, whether it's an E V car or bus or train. So, I totally agree with you. There's just, a real need for us to be aware of the potential undersupply of copper and that these new organic sources of demand. I think that we'll see the market be unprepared for that and what's going to give its price and then we're going to be playing catch up which will take us a long time to keep up with this new demand. 

Katz: Thanks Kurt. Thank you all for listening in this week this has been The Real Spiel. We'd love to hear from you any questions, comments, or feedback. We can be reached at therealspiel@USCFInvestments.com. Thank you again. We will talk to you next week.