Don’t fight the Politburo

If you have a Smart Meter, according to Citizens’ Advice, there is around a 20% chance it doesn’t work and you still have to send manual readings. There is around a 33% chance the display is broken too. Smart Motorways, meanwhile, are our safest roads, according to National Highways, although their stats do show that if you break down on a smart motorway without a hard shoulder, you are three times as likely to die. Presumably you have to be Smart to understand how both things can be true? Policy is likely to remain Smart, whoever wins the next election. Both the mandatory rollout of Smart Meters, and the construction of Smart Motorways are clearly Civil Service policies rather than Conservative or Labour. The point is, a lot of policy comes from the our Rolls Royce apparatchiks and quangos, and is likely to remain in place whoever wins the right to address the country from a lectern every five minutes. This may be annoying from a voter’s point of view, but can lead to opportunities for an investor.

There’s a saying in investment: ‘Don’t fight the Fed’. What it means is: if the people who set the rules tell you what they are going to do, it’s generally not Smart to invest as if they aren’t. In that light, whatever your views are on electric vehicles (they are less popular than they once were) or wind turbines (the economics aren’t great right now) promoting their manufacturing and use is going to remain a policy goal of whoever wins number 10. While this is true in the UK, it is even more true in China, where there isn’t even the pretence that voters might steer the country away from the policy priorities of the Politburo. One of those policy priorities is the green transition, and this is fuelling a massive and multi-year increase in demand for industrial commodities.

Green energy is very commodity intensive. According to analysis by BHP, onshore and offshore wind require 3.4x and 5.3x the amounts of steel per megawatt as natural gas, and 2x and 2.9x the amounts of copper. Last year the iron ore price (iron ore is used to make steel) was surprisingly strong even though the Chinese construction sector was weak. The major reason was the increase in demand for use in green projects. This strong backdrop is one reason that BlackRock World Mining’s (BRWM) managers, Evy Hambro and Olivia Markham, are overweight copper in their diversified fund.

Copper has had an extraordinary rally so far in 2024, and is up 24.8% at the time of writing. There have to be questions about how sustainable this rally is in the short term. Demand indicators from China have not been strong, while inventories are high. China is producing more and more refined copper for export too. Both cocoa and coffee have seen sharp rallies end in major sell-offs this year, and there has to be a risk that copper takes a break too.

Investors need to be wary of forecasts when it comes to commodities. In the case of copper, there is a broad difference of opinion on whether supply can match demand in 2024. Over 2023, there were a number of disruptions to supply which helped ignite interest in the metal. In Panama, First Quantum was forced to shut down Cobre Panama, one of the world’s largest copper mines, thanks to massive political protests against its involvement. Peru has also seen political opposition to new mines, while Chile’s Codelco, the world’s leading producer, is struggling to get production back to pre-pandemic highs, ING’s commodity strategists report. However, Chinese refined copper production is set to break records in 2024, and for this reason ING expects copper to take a break.

They do acknowledge though, that the reason for the raised production is China’s need for the metal to hit net zero goals. Construction, the traditional source of demand in China, has been weak, but investment in green infrastructure has grown rapidly. This investment in green infrastructure is the reason that Goldman Sachs, in their 2021 report on copper, suggested the metal needed to reach $15,000 a ton from its current c. $8k level to elicit enough production to meet the necessary volumes for the energy transition.

That’s a pretty exciting prospect as an investor. However, as we have discussed, there are plenty of reasons to fear a pullback in the short term. Stocks are high in China, and there has to be a possibility that what we are seeing is a speculative rally that could swiftly reverse if data points on short-term demand continue to disappoint.  For this reason, investing in copper as a part of a diversified portfolio, be that BRWM or its stablemate BlackRock Energy & Resources Income (BERI), which invests across the energy transition, could appeal. In our view though, having some exposure in one’s portfolio to the metals that will power the green transition is attractive on a long-term perspective. Whatever happens in the short term, and whether they work or not, Smart Grids and Smart Cars are in our future.

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