Copper’s Potential Power Surge: Energy, AI and Beyond

I'm Thalia Hayden with ETF guide.

It's so nice to see you again.

In these turbulent times, one thing remains constant.

The importance of electricity and with that the need for more copper helping us to understand this renewed interest in copper is Steve Schaall, director of ETF product management at Sprat Asset Management.

Steve, welcome to the program.

Great to see you again.

It's great to be back.

Thanks for having me.

And let's get started.

For those in our audience who are new to copper, what's so important about it?

Yeah.

So, copper is the third largest metal uh based on how much is mined uh in the value.

It's about $250 billion or so uh last year.

It comes only behind iron ore and gold.

So, it's you know, from that standpoint, it's very important to everything that we're doing from electrification to uh building.

You think construction, you think of your wiring and and the plumbing that goes into houses.

Uh we see it in all sorts of electronics.

Basically, anywhere that we see electricity need to be transmitted.

Uh you'll find copper.

It's the second most conductable metal behind silver.

Uh but it's much more cost effective than silver is costing about $445 a pound uh this morning versus about $37 per ounce for silver, which is why you tend to see copper being uh more in demand in applications than you do s uh silver.

Um it it also has demand that's rapidly growing as we're going through the energy transition, relying on AI and data centers and all the energy intense needs that are coming from that.

And uh what we're expecting as we move into the coming years and decades is a structural supply deficit for the copper market.

Great.

Let's dive in now.

SPAT provides the Sprat Copper Miners ETF ticker COP and the Sprat Junior Copper Miners ETF ticker COPJ.

Why two different ETFs?

Yeah, it's a great question. uh because at at the surface there are some similarities that are really important and I think that really sets uh the sprat lineup apart from what we see from other strategies.

Um first and foremost both are pure play strategies and what we mean by that is that they have at least 50% of their revenue or assets tied to you know things like copper miners, producers or explorers.

Uh this pure play test is very important in the copper market because when you look at the 10 largest producers uh only three of them are actually publicly traded or majority copper.

So you could see some companies that you know get 10% or 12% of their revenue from mining copper would be included in other ETF strategies.

Uh in our strategies we focus on those companies that are uh predominantly copper producers.

Um, by focusing on these pre-orplay companies, what I think investors will appreciate is that they have a lot less exposure uh relative to what they might have if it's more of a diversified type product.

But when we do look at some of the differences between the two funds, and there are a few important ones, uh, I'd say first with COP, that's an all cap mining ETF, so large, mid, small cap.

Uh and then as of June 23rd, it's also going to have the distinction of having about a 5% allocation of physical copper.

Uh so this is a change that we've made to the uh index strategy in conjunction with NASDAQ.

We think it adds an additional way for uh investors to access the copper market.

Uh the pure play notion as well as the um physical component are two things that are unique to this product versus any other ETF on the market.

If we look at COPJ, it still has those pure play characteristics.

U but it focuses more on those smaller cap miners which tends to be more exploration and development type companies.

A lot of time investors will like the junior space because there tends to be a little more volatility or leverage to the underlying commodity.

Uh and oftent times the larger miners are looking for acquisition targets to look to the junior miners.

Uh, and we've seen, you know, some conversations where these larger miners are looking to grow into the copper space.

They're looking for pure play copper miners, and we think that's something that investors are really gravitating towards.

Got it.

Makes sense.

Tech companies, they use a lot of electricity and therefore a lot of copper.

Where do you see that demand going?

Yeah.

So this is um an area that's really started to ramp up over the last 12 to 18 months as AI has really started to move into the forefront.

Uh copper has to be used not only for getting electricity to the data center but these data centers are very uh energyintensive endeavors and what we see is you know copper being used oftent times in favor of fiber optics for example uh because it runs much cooler than what fiber optics does and that keeps the cooling costs lower.

Um, another thing that benefits copper as it relates to AI is, um, it is very energy intense, but at the same time, uh, these tech companies have to grapple with the energy intensity along with, uh, staying true to their clean energy mandates that they often have on a corporate level.

And so, what we see is they're investing in things like wind and solar and a lot of investments for power um, data centers going to nuclear power.

Uh, when you look at the renewable energy side, it tends to be very much copper intensive.

It's about two and a half times uh the amount of copper needed for a solar wind installation compared to a traditional fossil fuel counterpart.

And just to give you an idea of kind of the growth that we see in this industry, you know, out through 2030, uh AI is expected to require about 5 metric tons of uh copper through the rest of this decade.

If we go out to 2050, it's anticipated that on an annual basis, AI will consume about 3 million metric tons.

A recent legislation is looking to reduce or even eliminate tax breaks and incentives for renewables and EVs.

How might that affect copper?

Yeah, so the EV story is um you know it's an important part of overall copper demand, but it's you know not the only part.

We have AI as we discussed.

We have um electrification as it's related to technology or higher standards of living in developing economies. the energy transition.

Those are all aspects that are contributing to copper demand.

Um I think one thing that tends to get lost as it relates to EV is that a lot of the growth that we see in that market is coming out of Europe and out of China.

So if you were to look at kind of divide the world into three separate sections with China, Europe and the United States, the US would rank number three.

Um just last year we had about 17 million actually a little bit more than that uh of EVs sold on a global scale.

But what you're starting to see is as you mentioned some of the roll back of these subsidies.

We see that playing throughout Europe in certain cases.

And I you know there we've seen growth still growing but it could have some impacts.

I know there's some discussions here in the United States about rolling back some of those subsidies.

I think what might be the next wave on a global scale um as those subsidies do get rolled back or if they do get rolled back is that you might see governments go moving from a carrot to more of a stick where now they're going to instead of giving you a subsidy to um purchase an EV uh they might have additional taxes if you're buying gas powered cars.

We see similar things like that happening uh in Norway.

But I think how things play out in the United States, at least in the near term, is that hybrids and probably specifically plug-in hybrids are going to be that next step uh until we get on to full electrification.

Steve, what challenges do miners face when it comes to increasing the supply of copper?

It's a great question.

We see this kind of pop its head up um amongst a lot of critical materials.

We see it with uranium, we see it with silver.

Um, copper is no different.

There's about I'd say probably four distinct things.

Uh, you can make an argument that there's more than that.

Um, but first would be uh that miners are grappling with declining uh or grades.

So, what this basically means is that they've mined out all the easy to get to material and they have to move more dirt in order to get more copper out of the ground.

Uh, so this is an issue that we're seeing.

Um, secondly, I I think what you're seeing, it's very much related to that, is that a lot of the copper miners are focusing on expanding production at existing mines because that's where the copper's at and they know how to get there.

Um, that they're not investing as much in exploration uh as they should.

Um, and this is leading kind of to the third issue, which is kind of a a downstream impact of that is that we're not really having these major copper discoveries like we're accustomed to seeing.

Uh over the last decade we've had 239 copper discoveries.

Of those only about 14 would be considered major discoveries.

So while we're mining out these other mines that have been producing for decades upon decade, um we're not finding these large discoveries to take over with that.

I just say finally one one area where hopefully some of the direction we've seen come out of the White House and also uh out of the Canadian government is they're looking to streamline the permitting process.

I think that could go a long way of shortening the lead time to get from uh discovery to production which could be you know 15 years or more uh in many cases.

So would you say investing in copper is like investing in gold, silver and other precious metals?

I'd hesitate to say it's kind of like a precious metal or or kind of on that same plane.

I I think if you were to to choose one, it's kind of acts a little bit more like silver.

Um the reason for that is because you know one they're both conductive as as we talked about from electricity standpoint.

Uh but silver is actually about 60% um industrial at this point.

So while it retains some of those um precious metals or monetary type characteristics, it does have a large percentage that is tied to industrial base.

Um so I think from that regard, you know, there's some similarities with silver, but I I don't think I'd make the assessment that it, you know, acts like a precious metal.

Okay.

Does copper uh is it a good hedge against inflation?

Would you say, you know, I think you could see some of that.

Um while it's not a precious metals, there there is um some aspects of the copper market and and critical materials in general that could lend itself to being an inflation hedge.

If if you just think about um the energy transition, for example, uh last year about $2.1 trillion was invested.

Uh that's a trend that we've seen growing fairly significantly year on year.

Um that spending is by nature inflationary as you're pumping more uh dollars into a certain market.

Um I think it really depends where you're looking at with in the industry.

If you're a manufacturer, somebody that's you know creating and manufacturing copper wires for example, uh you're going to be a cost taker.

So higher copper prices are going to hurt you.

Uh we tend to look upstream in the supply chain. again to those pure play miners.

Uh in that case, we expect them to benefit from higher copper prices as they pull copper out of the ground.

Uh we would expect that to have positive impacts for their financial position uh with the higher copper prices.

So for that reason why we tend to focus on the upstream companies and and don't really go downstream where you have to worry about um you know you could have the narrative right that you know you expect higher copper prices or higher demand. uh but based on the companies you're investing in, they might be price uh takers and and subject to higher prices and and the negative consequences of that.

And last question before you go, Steve, how might a copper ETF fit into most investors portfolios?

Yeah, so uh you know, we believe that we're in the very early stages of a a structural uptrend in in the copper market.

Um, with that we do see some investors that look at copper and and you know they have a well- diversified portfolio and they decide that you know given the growth that they expect out of the copper market they put this into the growth sleeve.

Uh we also do hear from investors that might take a much more thematic approach and they could have a basket of companies or or funds usually is the case where they're investing in that they believe to be high growth and we see investors you know including uh allocation of copper copper miners uh in those high growth allocations as well.

Steve, always great to see you.

Thank you so much for your timely insights and keep up the great work.

Absolutely.

Talk to you next time.

That does it for today's episode of Metals in Motion.

Thank you for joining us.

If you enjoyed the show, please tell us in that comment section below by hitting that like button.

To learn more about the copper ETFs discussed on today's program, be sure to visit spraetetfs.com.

I'm Thalia Hayden with ETF Guide.

Thanks for watching and we'll see you next time.