Why a Common Metal Has a Place in Your Portfolio
Like it or not, commodity-fueled inflation is here.
So far in 2021, the CRW Raw Industrials Index, a measure of the price movement of commodity markets, is up about 29%.
Commodities are the building blocks of the global economy; when their prices increase it creates inflation down the supply chain. Ultimately, you as the consumer must deal with higher prices. It’s no surprise that inflation, as the U.S. government measures it, was up more than 6% (annualized) in the second quarter.
Today, I will talk about a commodity that should provide some protection against inflation for your portfolio in the years ahead.
The Case for Copper
Copper is a metal that I think will face a severe shortage. It is also called Dr. Copper because of its importance to the economy due to its wide industrial applications.
Since the end of 2001, copper has climbed six-and-a-half fold, or 550%, outperforming virtually every other asset. This includes a 100 percentage-point advantage over the 450% total return in the S&P 500. Only gold is about equal to copper.
The extraordinary price gains in copper come with another statistic that should make us worry a lot. Those soaring prices came with soaring demand. But demand is only part of the story. Copper supply is the other half.
As copper demand climbs, more money is available to develop copper reserves. These reserves can be expanded either through deeper digging in existing mines or exploration and the development of new mines. A moderately healthy situation would be one in which rising prices are enough to keep reserves relatively constant.
Instead, however, during the past 20-year period, according to the USGS, copper reserves declined from an estimated 52 years of production to under 40.
You may think 40 years of reserves is still a lot. Unfortunately, what counts is not the number of years but whether that number is rising or falling. In the past 20 years, yearly declines in reserves averaged 0.6 years, or over seven months. That still would not be much to worry about if the rate of demand for copper was going to slow. Instead, for at least two major reasons growth in copper demand is nearly certain to accelerate and accelerate dramatically. At the same time, creating new reserves will likely become much harder and expensive…perhaps unaffordable.
The Developing World Driving Up Demand
For more than 60 years through about 2010, the total economy of the developed world with only 15% of the world’s population represented, on average, well over 50% of the world’s economy. Moreover, often during that period, the developing world, despite its much smaller base for growth, grew much more slowly than the developed world.
Today the developing world is not only larger than the developed world but is growing much faster. The developing world has income per capita of about 20% of the developed world, giving it tremendous room for further growth. Its ever-growing importance in the world economy suggests that accelerating rapid relative growth is inexorable. That means sharply accelerating demand for the basics ranging from copper to energy to virtually all other commodities.
Growth in the developing world is only one of the major reasons to expect sharply increasing copper demand. The world is embarking on creating probably the biggest industry in the history of mankind: the transition to renewable energies.
The Green Revolution
The costs of creating this industry, which will involve the deployment of more infrastructure than we probably built in the past century, will be enormous. For example, China, the world’s largest consumer of copper, devotes about half its copper consumption to developing a massive electric grid. This means that 25% of the world’s copper consumption is currently dedicated to developing an electric grid in China.
An electric grid that can accommodate renewable energies will be just one source of increasing copper demand. Electric vehicles (EVs) are another.
EVs require massive amounts of copper, many times that of gasoline powered cars. While internal combustion engines (ICEs) are powered by chemical reactions, EVs are powered by electrical transmission, which requires a great deal of copper wiring.
Wiring is only part of copper EV story. Copper’s most important role in EVs is in storing electricity, i.e., the battery. Bloomberg estimates that the demand for copper in lithium-ion batteries will climb from 2 million metric tons in 2020 to 14 million metric tons in 2030, about 70% of 2020 copper production.
I could go on and on. Virtually all aspects of the green revolution point to gigantic increases in copper production, which will come on top of the copper needed for accelerating growth in the developing world.
No matter which way I look at it, copper is a metal all investors should invest in. For our favorite copper mining play, click here now.