Shifting Energy: The Copper Growth Story

April 1, 2024 | 14 mins 34 secs 

In this  episode of Shifting Energy (Season 1), Thalia Hayden @etfguide talks with Ed Coyne, Senior Managing Partner and Steve Schoffstall, Director of ETF Product Management at Sprott Asset Management about the copper growth story, what's driving it and the investment opportunities now and ahead.

Video Transcript

Thalia Hayden: The global energy shift is officially on, driving demand for critical minerals like copper. On today's episode of Shifting Energy, we will examine the copper market, tell you about ETFs, track it, and the underlying factors that have turned copper into a high-demand commodity. Stay with us for that.

I am Thalia Hayden with ETF Guide. It's great to have you with us. Welcome to Shifting Energy, an original episode series that keeps you on top of big changes in the global energy transition. Today's focus is copper. It's element number 29 on the periodic table of elements. Copper has been a critical mineral for thousands of years in ancient civilizations. Everyday items like water vessels, harvesting tools, and razors were made of copper. Today, copper is equally important in our society as a semi-precious, malleable metal. Copper is used for electricity, electronics, building, construction, consumer healthcare products and transportation. But there's more to this story, and thanks to the global quest for net zero carbon emissions, copper has been pushed into the spotlight. So, what is copper's present and future role in the global energy transition, and how can you position your investment portfolio to participate? Here to discuss that and more is Steve Schoffstall, Director of ETF product management and Ed Coyne, Senior Managing Partner of Global Sales for Sprott Asset Management. It's great to have you both with us. Welcome to the program.

Ed Coyne: Great to be here. Thanks for having us. 

Thalia Hayden: Sure. Let's get started right now. From ancient times to now, copper has been a crucial mineral to society. Copper plays a huge role in the energy shift toward a carbon-free world. Ed, can you tell us more about copper's role in the energy shift and why decarbonization can't happen without copper?

Ed Coyne: Sure. It goes back to critical materials, generally being a growth story. When you think about copper, its role in electricity is unchanged, but the sheer volume of copper that's needed today relative to just a few years ago, whether it's electric vehicles, battery storage, movement of where energy is created to where energy is consumed, you simply just need more of it. That's going to continue as we look for other ways to energize the global economy. Not to mention the technological aspect, but more people are coming on the electric grid globally and gaining access to electricity. More copper is going to be needed for that. So, nothing's changing in the core technology of it, but the sheer demand for it is increasing rapidly.

Thalia Hayden: Got it. Next, let's talk about the forces driving copper demand and why it's a megatrend that investors should pay attention to. Steve, do you want to take this one?

Steve Schoffstall: Absolutely. So EVs are a spot of the energy transition that we really can’t underestimate. When we look at how many were sold last year, we're around 14 million EVs. That's significant growth that we're seeing. If we just go back to just three short years ago, the growth between then and now is about fourfold. So, very much accelerating the usage of EVs. And why that's important as it relates to copper is when you start to think about these newer technologies, they tend to be much more electrified. If you look at an internal combustion engine, your typical gas-powered car is relative to a typical EV, and you're going to need about 2.4 times the copper in an EV as you would in that gas-powered car. Then, when we look at the entire infrastructure needed to support the EVs, we see that it's not just related to the vehicle itself.

When we start to think about charging stations, for example, they can require anywhere from one and a half to about 17 and a half pounds of copper, depending on the charger being used. This is also an area where we're starting to see increased investment. When we look at the overall global investment in the energy transition, last year, it was just south of $1.8 trillion on a global scale, and about $630 billion of that was related to electrified transportation. Think about EVs and building out the infrastructure for that. They’re contributing to the growth sector that we're seeing as it relates to copper and the energy transition in general.

Thalia Hayden: That certainly makes sense. While electricity demand is expected to climb 86% by 2050, according to the IEA World Energy Outlook, global electricity demand will put tremendous stress on electric grids everywhere. In fact, many of these grids will need massive upgrades. What role will copper play in this megatrend, Steve?

Steve Schoffstall: This is a part of the overall copper story that normally gets overlooked. A lot of focus is on EVs and the energy transition, but as you stated, there's an expected increase in electricity demand of about 86%. A lot of that comes from Western nations. As we get more technologically advanced and much more integrated with our technology, whether it's EVs or other electric applications, the increased usage of smartphones and what we see in many developing countries is that we're starting to see a rising middle class. And that in and of itself is requiring much more electricity. The great thing about copper is that it's not only the second-best conductor of electricity next to silver; when you compare the two metals, it is much more cost-effective to use copper. That's why when we see any place where we have to move electrical currents, we typically see copper being used over silver.

And this whole process of generating cleaner energy takes a lot more copper than we see with traditional fossil fuel-powered plants. If we were to look at something like solar power or wind power, that's going to use about two and a half times the copper that we see from a coal-fired plant or a natural gas plant. If we start looking at offshore wind farms, that goes up to about seven times. So, as we're having this increased demand from the energy transition, we also have this increased demand just from the way that the demographics of the population are changing.

Thalia Hayden: Great information. Now shifting gears a little beyond the adoption of EVs and the coming wave of electric grid upgrades, are there other notable growth trends driving copper usage and demand?

Steve Schoffstall: A lot of what we see is from the energy transition, and one of the reasons that we focus on copper is because we see a lot of that growth coming from the energy transition. One thing that is very important for investors to know is the supply side of the equation. We’re running at a small supply deficit now for copper, but we expect that to increase as we progress through this energy transition. Our electric needs will increase considerably over the next several decades. And just to put that in some context, if you look at all of human history, if we mined somewhere around 700 million tons of copper, some estimates say that by the time we get to 2050, we're going to have to mine about twice that, so an additional 1.4 billion pounds.

The issue that we have is one: we have to find new supplies of copper because we're in a situation where a lot of the copper that's been mined has been the “easy” copper. If you look at about 150 years ago, we have to move much more of the material just to get the copper out of the ground that we were. We also have to go to more remote parts of the world to find plentiful mining resources and copper resources. That's also been a challenge, as many of these places don't have infrastructure. Once we discover a new resource to get that resource up and producing in a meaningful way, you're typically looking at about 16 years. It's a very long process from finding a new mine to going through the permitting and then the construction part of the process. A lot of work has to be done on the supply side if we're going to keep up with demand.

Thalia Hayden: Wow, that was very insightful. Thanks so much, Steven. Ed, this one's for you. This brought copper miners ETF and junior copper miners. ETFs are ways to participate in copper's growth story. So how do these copper ETFs work, and what do they own?

Ed Coyne: Sure. We co-created an index with NASDAQ to track the performance of copper equities. When you look at what's going on in the overall copper market, whether you're talking about large-cap senior copper mining companies or the more opportunistic small-cap or junior copper mining companies, with this index creation, we're looking to give investors exposure to the copper space through the underlining mining stocks or equities. Through that, we're giving clients the exposure on the senior side where you see these developed companies; they have a long track record, a long history and diversification as it relates to where their mines are located. And then, for those looking for more of an opportunistic approach to the space, we give exposure to the juniors, which in some cases are late-stage discovery or early-stage development. They have potentially, in some cases, a longer runway, and they also have the option to be acquired over time as some of the senior mining companies out there are looking to replace some of the reserves.

There are unique ways to think about the copper space through the underlying equities. For those unfamiliar with mining in general, if you think about the large-cap senior mining ETF, COPP, that would be similar to what you'd expect in S&P-type indexes. Not the same market cap, but typically above $10 billion in market cap. However, as far as how investors think about investing in this index, the senior would be more large-cap and more akin to the S&P 500, as far as how that would look and feel on the junior side. That would be more small-cap in nature. For investors who are typically comfortable investing in traditional equity markets, that would be more akin to Russell 2000—so smaller, more regional type of companies. When we talk about senior versus junior as it relates to the mining stocks and both these ETFs, COPJ would be the junior one.

Both these ETFs are giving investors exposure in a pure-play fashion. We’re not investing in the overall ecosystem of the copper space trucking companies and industry companies and so forth. We're looking at the underlying mining stocks to give you direct access and allocation to the copper market. I think this is important because so often, investors will say, well, I own a general commodity fund, and I'm getting exposure to the general markets. Well, suppose you believe from an investment thesis standpoint that copper, as we do, will continue to expand from a supply-demand perspective, which we think should increase price discovery. In that case, you're really not going to capture that in an overall commodity fund. You need a very specific pure-play type of allocation. And we think at Sprott, we deliver that both on the senior COPP and the junior COPJ.

Thalia Hayden: Alright. And one final question before we wrap up. This one's going to go to both of you. We'll start with Ed. How do you see an ETF, like COPP, deployed by financial advisors and investors inside a diversified portfolio?

Ed Coyne: Sure. When you look at the return patterns we have always discussed, Sprott also has a long history as a precious metals firm. It's the same thing when you talk about what we do in the gold or silver markets. You're looking for diversity in your return patterns, which move at different times. Historically, copper has been a bellwether when you think about it from a performance pattern of the strength or weakness of an economy. Today, everyone's focused on China, saying China's slowing. That's why copper has sold off a little bit. However, more recently, it's doing well. We see this opportunity as unique in that regardless of whether the economies are slowing or not; there's so much capital being invested in the infrastructure of alternative energy, clean energy, trying to get to this carbon-neutral footprint that we think copper is going to continue to look very attractive out there potentially over time.

This gives you real diversity within your portfolio, just not above and beyond what's going on in the global economy, but what's happening and how capital is being deployed in this movement. So we think for investors that look to get some diversity in their portfolio, to get an asset or two in their portfolio that has a different performance pattern than the core of their portfolio, we think right now both the senior COPP and the junior COPJ are a really interesting way to participate in the movement and diversify their portfolio and get a different performance pattern than maybe the core of their portfolio.

Thalia Hayden: And Steve, your insight here.

Steve Schoffstall: I would agree with that, Ed. And just to highlight, copper has often been named Dr. Copper because it is a barometer for the global economy. And just to highlight something Ed said and something we spoke about here: when we see this increased investment in the energy transition, a lot comes from China. A lot of it's working its way through the European Union and the United States, where we're seeing increasing amounts of investment. However, we see from China that copper has remained a very good gauge of global economic growth, but we're starting to see decoupling there. And some of that comes around because we're seeing China invest in the energy transition. It's helping to support copper prices. And so, in our view, copper is one of those critical minerals that we think can add a degree of diversification to a portfolio, or alternatively, could be used as a growth asset allocator within a portfolio as well.

Thalia Hayden: We could talk about this much longer, but unfortunately, we need to leave things here. Thank you so much, Steve and Ed, for your copper insights. Keep up the great work.

Steve Schoffstall: Thank you.

Ed Coyne: Thank you.

Thalia Hayden: And that does it for today's episode of Shifting Energy. If you enjoyed the show, tell us in the comments section below by hitting that like button. To learn more about the investment strategies and ETFs we discuss in today's program, visit Sprottetfs.com. I'm Thalia Hayden with ETF Guide. Thanks for watching, and we'll see you next time.