In this FundCalibre interview, Evy Hambro, co-manager of the BlackRock World Mining Trust, explores how supply constraints, demand fluctuations, and macroeconomic trends impact commodity investment decisions alongside key themes such as digital transformation, AI, and the energy transition. Evy provides insights into the balance between profitability and risk, and offers a forward-looking perspective on opportunities in the mining sector.
Why you should listen to the interview
For those interested in understanding the commodity sector’s complexities, this interview offers valuable insights into how global economic shifts, technological advancements, and strategic investments in metals like copper and gold can drive portfolio success. It’s an excellent listen for those looking to navigate the evolving landscape of resource-based investments.
This interview was recorded on 21 August 2024. Please note, answers are edited and condensed for clarity. To gain a fuller understanding and clearer context, please listen to the full interview.
Interview highlights:
The metal driving demand for years to come
“Copper is one of those metals that is likely to be – and has been a major beneficiary – of those huge kind of mega forces that have been kind of driving some of the themes across equity markets. For example, I’m sure we’re all familiar with the success of many the AI related companies that have done incredibly well. Copper is one of those commodities that is likely to be a major beneficiary of that.
“And if we’re gonna go forward into this kind of digital world, we’re gonna have a rising dependence on cloud and semiconductors and data storage and going to need more high quality energy with lower levels of disruption and obviously lower carbon footprint to its production.Then copper’s gonna be a major beneficiary of that spending.
“So copper is one of the ones that kind of stands out with the biggest, I guess, gap between supply and demand over the next few years based upon what people are expecting demand growth to be and supply is pretty benign in terms of the outlook. So that gap or that shortfall is likely to have a pretty big impact on pricing.”
The valuation disparity is enormous
“The thing that I find quite startling just broadly in equity markets is the valuation of companies that are considered to be closest to or have the cleanest exposure to some of those AI themes. The valuations they trade at is eye watering.
“So the cost of capital of that company is kind of the furthest point down the chain, the semiconductor companies and so on is eye watering. And the more you come upstream, back up that supply chain, the cheaper the companies tend to be. And when you get right to the very, very end of that, you get the resource companies. None of the downstream from that could happen if the copper wasn’t there, and so on. So I think that valuation arbitrage, or anomaly, or disparity, is something that we find intriguing. And we hope that some of that gap starts to close.
“I think as people become more concerned about where they’re going to get the things they need, people might start to pay up for it. It’s a little bit like what happens in the oil market when you get disruption at oil supply based on, I don’t know, war or some other thing. You get that premium pricing coming into the market. We haven’t seen that yet, but when you look at a commodity like copper, you look at the world’s largest producer of copper by country is Chile. Chile produces more than double the market share in copper that Saudi produces in oil. Peru produces the same amount of copper in terms of percentage that Saudi produces in oil. But people don’t really care about them.
“You’ve got strikes going on, you’ve got political changes in those countries. You’ve got an inability of those two countries to be able to grow production substantially. And yet the world is dependent upon them in this race towards AI and so on, because of the copper intensity of it. So we find that intriguing that this area is so easily overlooked and the risks are so easily ignored that at some point people are going to have to start paying out for them.”
How metals and energy transition go hand in hand
“The energy transition itself, the move away from a carbon intensive or fossil fuel driven global economy towards one that’s greener requires an enormous amount of materials. We all know that you need way more metal in renewables than you do in a coal-fired power station. And so you are swapping fossil fuels effectively for a higher intensity of use of materials.
“So you’ve got this energy transition theme, which is an enormous theme globally. And at the same time, you’ve got this AI theme and you mentioned earlier on about how some of these things often overlap. Those two things very much overlap.
“So I think what we are seeing is a rising energy intensity per unit of GDP. So for many years now, we’ve obviously had energy demand as a whole relative to GDP hasn’t risen that much, but we’re going into a more digital driven global economy. And as we do that, we’re gonna see more and more need for energy units. If there’s energy units are going to be coming from cleaner sources, then we need more materials attached to that.
“So we’ve got, the AI bit acting as a demand for energy consumption. And we’ve got the energy transition, which is the delivery of those energy units requiring a lower carbon footprint. A combination of those two things together means that the shape of the global economy in the future is gonna be much more materials intensive than the direction of travel we’ve been going in over the past few years.
“And when we think about the power consumption of data centers, the impact it has on some of the regional economies. I mean, I was reading just a few weeks ago about 18% of power demand in Ireland now is, comes from data centers. That’s an enormous number. Imagine the infrastructure that’s being put in place to be able to support that and then in turn the materials that go into that infrastructure. So the two things are very much intertwined.”
Conclusion:
As the world continues to embrace digital transformation and a greener economy, the demand for essential metals is set to rise. This episode provides a comprehensive look at how to strategically position investments to capitalise on these trends. By understanding the nuances of supply constraints, demand shifts, and broader economic forces, investors can better navigate the complexities of the commodity sector and optimise their portfolios for future growth.
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