It feels as if one cannot go a day without hearing about artificial intelligence (AI). It is so prevalent in the news and in corporate America that I’ve almost become dull to the term. Recently, a friend of mine mentioned how he uses ChatGPT to write a new bedtime story for his children each night. He provided specific parameters of a topic, names to use, story length, etc., and in a few seconds, he was able to read his children a new bedtime story. I had to see it with my own eyes, so the next night I downloaded ChatGPT, tested it out for myself and voila — a new bedtime routine was formed, saving countless minutes each night. Clearly, there are a myriad of other more useful and important ways to utilize AI both personally and professionally; however, one thing appears to be certain — the power of AI technology is only increasing, and the number of users globally will increase as well.
When we think of AI and investing, the first thing that may come to mind are the companies directly involved, such as the chipmakers who are the clear frontrunners in AI technology. These companies have seen their stock prices increase exponentially. One layer lower is the cloud computing companies, whose stock prices have also benefited greatly over the past year. Recently, we’ve seen other layers and even tangents off of the AI food chain start to see their stock prices go vertical. For example, two Texas-based power companies have experienced strong uplift in their stock prices from the expected incremental demand to operate all of these powerful layers of AI and the corresponding electrical infrastructure. Digging one layer deeper (pun intended) would expose the critical commodity required for this incremental electrification — copper.
Copper is a commodity; therefore, the huge value-add margins and economies of scale aren’t nearly that of the top layers of the AI food chain. However, without the power and infrastructure to operate all of those layers, the type of growth and power that investors are seeking would be significantly hindered. Electric vehicles also require this type of power infrastructure, necessitating significantly more copper per vehicle than the traditional gasoline-powered car. Therefore, one could reason that the road forward for AI and electric vehicles requires a strong demand for copper.
Investors are well aware of the need for copper to power and further electrify the world. However, some recent events and delays impacting the global supply of copper coupled with the increasing demand are what could send copper prices higher. The global capacity delays and indefinite shutdowns of copper mines have led to a supply/demand imbalance. Historically, this has led to higher copper prices, and in turn, higher stock prices and valuations. As seen in today’s Chart of the Week, the decrease in treatment charges for copper concentrate usually coincides with or portends higher copper prices. The main driver is that the smelters charge these treatment charges to the copper miners so they can process and operate their plants. When the supply of copper is tight, the smelters lower treatment charges in order to operate the smelters at higher utilization rates, competing for that limited copper supply. The chart shows treatment charges have been declining precipitously, and I am seeing they are down more than 90% and are closer to $6 per ton as of March 22, 2024 (which is not reflected in the chart yet), hitting new all-time lows.1 Essentially, the smelters are willing to lose money to be able to operate their plants, which requires them to try to source the limited copper that is still available. If there is not enough copper supply for the smelters and demand is expected to increase, this will likely lead to higher prices and higher valuations for copper miners.
Key Takeaway
AI is undoubtedly saving people a lot of time and thereby making us more productive. The AI infrastructure, energy transition and electrification of cars, among other new technologies, will all require more power and energy. The demand for more power and energy, in turn, will result in demand for more copper. At the same time, the supply of copper has currently been curtailed and delayed for a variety of reasons unrelated to the underlying demand. As a result, I believe demand for copper will continue to be strong, and the price should continue to move higher. Investors with positions in copper miners, both bond and equity investors alike, should welcome the higher copper prices, as their stock prices haven't experienced the same dramatic rise as the other, more direct AI industries.
Source:
1Fastmarkets – Copper concentrate market participants lost amid ‘unstoppable’ declines in TC/RCs; 3/26/24
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