Copper vs. Oil
The Q1 2018 meeting of the Incrementum Fund’s Advisory Board took place on January 24, about one week before the recent market turmoil began. In a way it is funny that this group of contrarians who are well known for their skeptical stance on the risk asset bubble, didn’t really discuss the stock market much on this occasion. Of course there was little to add to what was already talked about extensively at previous meetings. Moreover, the main focus was on the topic presented by this meeting’s special guest, Gianni Kovacevic.
Copperbank chairman Gianni Kovacevic
Gianni believes that oil has a bleak future as a fuel for transportation, as he expects the trend toward adoption of electrical vehicles to accelerate – not least because government mandates to this effect have begun to proliferate. This trend should in turn boost long term demand for copper, as the existing electrical infrastructure will have to be adapted to cope with rising demand for electricity.
We have to admit that we are personally still a bit skeptical with respect to this particular notion. While it is clear that government mandates and subsidies for “clean energy” have multiplied well beyond the nuisance level in many countries, we harbor grave doubts about the ability of government decrees to trump issues of economic viability.
Gianni’s main argument is though that while oil prices are likely to be capped by the fact that advances in extraction technology (i.e., fracking) have created a source of supply that can be rapidly switched on and off as needed, a similar revolution has not taken place with respect to copper supply. On the contrary, not only were there very few new copper finds due to investment drying up over the past decade, mine development has become such an onerous and time-consuming process that it is hard to see how there can be a rapid reaction in terms of supply additions should hitherto unexpected demand growth materialize.
Over the past three years, copper and crude oil have moved in tandem, reflecting both the vagaries of the USD exchange rate and perceptions about global economic growth.
Indeed, as the chart included in the transcript shows (the transcript is available for download below), the number of significant mineral discoveries between 2011 and 2017 in both the precious metals and industrial metals categories has shrunk more dramatically than in any commodities bear market since at least 1975.
Due to the unique stock-to-flows situation in gold and silver, the dearth of discoveries is not as significant for the prices of these two metals as it is for those of base metals. If one looks at the action in some of the less liquid base metals such as e.g. zinc in recent years, one can see that a relatively small shift in perceptions about demand can indeed have an outsized effect on prices under such circumstances.
Zinc, weekly – since putting in a low in early 2016, zinc prices have made an …read more
Source:: Acting Man
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