A portfolio with an underinvestment in copper may not translate to a clean bill of health from “Dr. Copper.” The structural shifts transforming the global copper market is creating explosive growth opportunities in the metal. Steve Schoffstall, Head of ETFs at Sprott Asset Management, joined TMX VettaFi Senior Industry Analyst Kirsten Chang in a webinar: Copper’s Surge: Rewriting the Investment Case.
Schoffstall succinctly made the case that copper’s traditional role as a cyclical barometer for economic health is morphing into a secular growth story driven by electrical infrastructure and a confluence of other factors.
Growth From All Angles
China’s urbanization once defined the copper market, but new structural drivers are emerging. An interesting takeaway was the link between a country’s wealth and the need for electricity — the greater the wealth, the higher the demand.
Schoffstall highlighted that “growth is coming from the electrical infrastructure,” which now accounts for a massive portion of total usage. As such, key demand drivers include the following:
- AI-Data Center Boom: The demand for power by global data centers is projected to rise 2.5x in just less than five years. Schoffstall emphasized that “AI data centers require much more electricity,” noting that by the year 2030, the electricity required to power global data centers would be equivalent to the total power consumption of the entire country of Japan.
- Energy Security: Rising geopolitical tensions is fueling need for alternative energy; seeking clean energy sources like electricity will drive copper demand higher. Electricity demand is projected to rise by 157% in less than 30 years. Schoffstall noted that “energy security is now paramount,” which is leading to nations building out diversified energy systems that rely more heavily on copper.
- Modern Defense: NATO’s pledge to raise defense spending creates a massive source of demand. Furthermore, technological advancements in defense equipment will require more electricity use. Schoffstall stated that “copper is a foundational material in virtually every advanced military system” and is virtually “irreplaceable” when it comes to usage in high-performance electronics.
Supply Challenges
Unfortunately, the higher demand is being offset by supply headwinds. As Schoffstall noted, “long lead times” can reduce the ability for supply to meet demand, noting that it can take an average of 17 years to move from the discovery phase to first production. This is double the time frame when compared to the 1990s.
Additionally, mine disruptions are increasing with major outages at global sites, which is pushing the market into a deficit. Schoffstall also noted that “ore grades are declining,” making it more costly and difficult to extract copper. He observed that many major miners are struggling to replace their reserves, which results in a “hollowed-out” supply pipeline.
The Sprott Case For COPP and COPJ
The data presented supports a compelling case for targeted exposure through the Sprott Copper Miners ETF (COPP) and the Sprott Junior Copper Miners ETF (COPJ). Schoffstall noted that copper miners are exhibiting healthy profitability, resulting in improved financials. As such, miners are 44% less expensive versus the S&P 500, offering greater value compared to the broader market.
COPP provides pure-play exposure to large-cap miners as well as physical copper. For investors seeking higher growth potential, COPJ provides unique exposure to small-cap exploration- and development-stage miners. Schoffstall warned that “junior copper miners tend to be a little bit more volatile,” but are essential for future supply. Major miners looking to replenish reserves may also view small-cap companies as “attractive acquisition targets,” providing a unique catalyst for the 223.50% return the segment witnessed within the last five years.
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Disclosures
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Sprott Asset Management USA, Inc. is the Investment Adviser to the ETFs. ALPS Distributors, Inc. is the Distributor for the ETFs and is a registered broker-dealer and FINRA Member. ALPS Distributors, Inc. is not affiliated with Sprott Asset Management USA, Inc. or VettaFi.
Exchange Traded Funds (ETFs): SETM, LITP, URNM, URN, COPP, COPJ, NIKL, SGDM, SGDJ, SLVR, GBUG, METL
Physical Bullion Funds: PHYS, PSLV, CEF, and SPPP.
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