Jeff Currie on Why Copper Is His Highest-Conviction Trade Ever

things that the world wants to do. And then for a couple of years, copper just kind of went away. The price started dropping, and now it's back.

et cetera. And we can also, i think, you know, as many analysts have observed, forecast supply fairly easily because we know what mines are out there, We know that minds have a really long lead time et cetera from

decision to break new ground to actually producing copper. So like, there are these certainties, but then the problem is, like in the meantime, when you have these sort of periods of spot weakness where there isn't a supply shortage or there's plenty of copper, you know, those periods don't exactly like encourage companies to like get mining or get digging, and in fact, they could slow down expansion plans. Even if everyone sort of knows the long term math checks out.

commodities were surging as the global economy was reopening. Then we talked to him again in twenty twenty two and he said that Hopper specifically may end up being one of the the tightest commodity markets he's ever seen, so real, real issues with supply and again looking pretty good these days. So we are back with Jeff Curry, who is now in a new role. So when we talked to him before, he was the head of Commodities research at Goldman Sachs, but today he is the chief Strategy Officer of Energy

Pathways at the Carlisle Group. So, Jeff, thank you so much for coming back on odd lots.

the revenge of the old economy. Put bluntly poor returns in the old economy, saw capital redirected to the new economy, starving the old economy of the investment it needed to grow the supply base. Pretty straightforward story. Still the story in markets like upper or even oil to a lesser extent, but it's pretty much apparent across the old economy. So structural supply story very much intact. What about demand? If anything,

the structural demand stories have been turbocharged. Let's go and review the three big policy initiatives we saw driving demand. The way we talked about them back then was redlining commodity demand. Reed, they are standard for redistribution policies. Basically, as lower income groups consumed with higher wages, higher income, they consume a greater share of commodities than the higher

income groups. That's very much alive and kicking. You look at the low unemployment rate, who's the biggest benefactor of that? It is the lower income groups. And you know, policies still very much in play all over the world, right now reinforcing these lower income groups in the consumption of commodit They so you are. And then you had e the environmental policy turbocharged from the last time we talked, you have the IR the repower EU China now part

of the reason why coppers rallied recently. China's growth was over one hundred percent in green capex last year, thirty percent this year. So everywhere you look in the world, we see environmental policy through green capac stimulating demand for commodities. And then the third one, which was the D the D globalization. Again that's far greater than we ever thought. Look at the potential military spin in the US ninety

five billion dollars on munitions. We look at what's going on in places like Germany one hundred billion dollars of military spend. So you've got all three going much stronger than what we would have thought two to three years ago. So what went wrong? I want to first start with the disinflation story, and then I want to finish by talking about the dollar. The dollar has been a big

headwind to commodities. When we think about the disinflation that occurred late last year in the early part of this year, One thing to keep in mind is that it was globally correlated. It occurred against the backdrop of record commodity demand and incredibly strong GDP growth in US and even China was plus five percent. So what does that tell you? Was it demand driven weakness and prices or was it supply driven? It tells you it had to be supply driven.

It's the only thing that could give you that pattern of observations. So the supply driven. Where did they get the supply? I would argue is through regulatory easy whether if it was you know, on sanctions allowing sanctioned oil to flow more freely, particularly in places like US, Iran, Venezuelan. Obviously that had a cost with Iranian hoodies or even the Venezuelans attacking Guyana, but that was a source of supply. The other source of supply apply was turning a blind

eye to environmental policy around the world. We have record coal production out of China, Indonesia, and India. Actually that increase in coal production was bigger than Saudi Arabia. Im backed up gas prices and power prices around the world. We saw you know, cutting down mangroves in Malaysia or

deforestation for more food in places like Latin America. And then the third one, regulatory easing was through immigration, so you got more energy, more food, and you had more labor, which helped create the disinflationary pressures that we saw the last sever years. I'm not going to say it's the only cause, but it put you know, a big headwind

to the commodity story. And by the way, that's going to run its course, particularly after the election, because you look at you know, the clamping down on Iranian sanctions one hundred and eighty days from now. Surprise, surprise, that's after the November election. Now let's turn let's talk about the dollar. That's the other big headwind here. Historically, when commodity prices would rise, you would have places like Saudi Arabia become long US dollars. They would recycle those dollars

into US treasuries. Interest rates would go down as they bought treasuries. This would create a weaker dollar that would reinforce higher reflation. If we called it the three rs.

You'd start with releveraging in China so you get growth outside of outside of the US, and then you would have convergence in global growth, and then you would have the purchases and the stronger growth in the emerging markets buy US treasuries and that would create the weaker dollar in hence the reflation, and you were in a virtuous loop. That's how we went to one hundred and forty seven dollars oil in the two thousands, and the same thing

happened in the seventies for the first time ever. That dollar recycling is not a curry and what is replacing it? I like to call it gold recycling. It explains a lot why goal prices are as strong as they are, and what is the evidence of that is that the emerging markets, the brick countries all met with Saudi Arabia and other key participants November of last year and discuss how they're going to trade with one another using local currencies and then whatever it nets out and settling, they

would settle in gold. So you've taken out that dollar recycling. China's not doing it, and think about why would they do it with everything they've seen with Russia over the course of the last several years. So that's an important difference here. It doesn't mean it's a very supercycle, but you're unlikely to see that dollar recycling playing out probably ever again, which means that what do they do with this?

If they're buying physical goods like gold, they could be buying things like oil, copper, and other commodities as we look forward. So those are the two big headwinds why I'd argue we're wrong, But the fundamental story still very much intact, particularly with copper.

we have not been investing. It's ted you up for what I would argue is the most bullish commodity that actually I just quote many of our clients and other market participants say, you know, it's the highest conviction trade they've ever seen.

or at a minimum see lots of upside potential. Why didn't that play out in the sort of immediate post pandemic years.

now seen enough evidence last year and this year. For example, you know, copper demand so far this year is up six percent year over year despite an incredibly weak property market in China. So I think what has shifted here is confidence from investors in metals that you can buy these markets based upon the green cap back story despite a weak China property story. And I think that's what has really changed in the last let's say six to eighteen months.

start off? Started off with the creation of BHP REO. You know, then you had exceon Mobile, VP Shell, all the super majors were all created, both in metals and energy at the beginning of that supercycle because it was easier to consolidate to grow your supply than it was

to do it through green field investment. And so well, because we observe that going on, it tells you we're not at the point right now where people are willing to make greenfield investments because they can buy other companies more cheaply, which means prices got to go higher and the conviction has got to be greater before you start to see that substantial rise in greenfield investment.

that hey, this is real. We're three years into this and the confidence is so so, you know, the diehards that I talk to have a lot of confidence, which means you probably need more higher prices for people become convicted that it's actually for real. What creates the second big uptick in prices because once these companies start to spend, then you get cost inflation and that drives you up

to the next level. And if you look at what happened with copper in the two thousands, we went from let's say two thousand a ton to four thousand a ton over that first three years, and then around six throughh eight it exploded to eight thousand dollars a ton because that's when they started to spend. But they had to achieve that confidence that still is not apparent in

this market. And then let's say, you know, the final five to six years is when you begin to deep bottle neck the system and then the investment plays out and you know, it takes another let's say seven years and you get actual supply. So where are we in that process? We're still in that first three years creating conviction around Is this for real, our estmates? You need to be above nine ten thousand dollars a done before people really start to be confident that they can make

this type of investment. And I think the other thing too is not only does their prices have to reach those levels where the breake events begin to happen, but they got to go above to create some type of confidence that they have some type of cushion, which means we like to see much higher prices before you start to see that supply response.

But one time I had an Uber driver and he's like, I'm really you know, you're talking about gold, he said, I'm really bullish silver because I believe there's not enough copper mining going on in the world, and silver is often a byproduct of copper mining, and there's a lot of silver content and some of this evy stuff, particularly solar panels, he said, and therefore there's going to be

a shortage of silver. And I know this is like a little diversion, but I just had to get this off my head because we're here talking to Jeff Curry. What do you think about my uber drivers thesis?

there's just too much of the stuff around. There's you know, millennia of production is sitting above ground, like gold, but unlike gold, it is not as rare, so it's more plentiful. So I think, yeah, it will behave similar to what he said, But I'm never going to be jumping on the super bowlish bandwagon on silver just because of the fact that there's just so much of it around the world and it's not nearly as rare as something like gold.

this point. That would be fun. Jeff, There's one other thing I want to ask you, So you know we're talking about the price of copper, the future's price, I want to ask you about the copper concentrates market and get into like a little bit of the discrepancy between

like maybe the financialized price versus the physical price. Can you walk us through what's been happening there, because in some respects like this is where the immediate shortage is playing out, even if it hasn't been reflected up until recently in the overall futures price.

the very first signs of a shortage. It actually was in sk in Korea, where there was not enough concentrate to go around to be able to smell into something that was more useful. And so it's called the you know, the TC charges, the concentrate charges, And right now everybody's oh, they're negative, which is telling you the shortage is at the mine and that concentrate not at the inn used consumer. Yet it's gonna work its way down there. By the way,

it's the same thing happens in refining margins. When you have a real big shortage in oil, it crushes the

refining margins. And so the fact that you have zero or negative TC charges right now is an indication that you have shortages at the mine, which says eventually this is going to work further downstream, which as we look out further, particularly towards the end of the year, we'd expect those shortages to work further downstream, more towards this consumer in a way from the mind, but absolutely, I think that's a critical And it was about two or

three weeks ago. One morning I was looking at the Koreans and go, wow, here we are finally physical shortages happening at the concentrate level, which is telling you just a matter of time before we see it at the inn us consumer level.

We know that demand destruction occurred. Now, we'd never had another opportunity other than that time period to observe demand destruction, because that's basically, you know, at the inn us consumer level, you're out of supply, like that Korean concentrate situation, you ran out of supply, you're short, and now you have to get the in US consumer to ration their demand out. That's to find out how high these commodity prices can go.

And at fifteen thousand dollars, a Ton was saying, Okay, the only time in history we've observed actual physical demand destruction or rationing of physical supplies was that time period. Whether or not that holds in the current environment, we'll find out. But that's our best guess of where prices could go because we've seen it before. How long does it take to get to that dynamic? You know, I thought we would have been to that dynamic by now.

I would tend to think of, you know, if we meet back up in the next twelve to eighteen months, there's a probability that where we're looking at prices in that twelve, five hundred and fifteen thousand dollars range, because if we know what's happening at the concentrate level, it's just a matter of time before it starts to physically happen at the inn us level and that's where places, you know, the markets like the LM and the comacs are pricing it and that's where you would see that price bike.

and the green. And I have a saying I like to say it's critical here is if you don't own the emissions, you cannot control the emissions. So you have investors out there, you know that they don't have emissions in their portfolio, but it doesn't mean emissions are going down. In fact, what do they do with the last Every year since started this process, they've gone up. They haven't gone down, and the only way you're going to make

them go down is start concentrating. Instead of thinking about net zero, think about what happens this year versus next year, and are we going to get them down, particularly inside of the portfolio, because by taking them completely out of the portfolio, there's no way you can control or say anything that they actually went down. And so when we think about the dynamic here is we don't know the pathway.

I like to point out in the War on Acid reign during the nineteen seventies and eighties, when we took the sulfur and the aerosols out of the atmosphere, it was a smashing success. They remain technologically agnostic, and I like to point out, who would have ever think that if you put platinum platium in your tail pipe you're going to get rid of these aerosols. But it took trial and error trying those different pathways until you found

the one that actually worked. And so we're using the term pathways here is to really denote this whole idea that we don't know what the answer is. We're going to be trying these different ones. We may have the one we need right now, we may own it, But finding that exact pathways is really the goal here, and looking at that connection between the brown and grain is going to be central to creating a managed transition that is less chaotic than what we've already seen.

way you view and analyze the oil market. How big of a difference has that made.

in Bachan. You're not repeating the Bacan and the Golf of Mexico, which means the only ones that you can repeat are really the permium. Now, let's take that aside, and then let's put this in the context of the supply increases that you saw out of i Rant. You know, it was eight hundred and fifty thousand barrels per day. Out of Venezuela. It was one hundred and fifty thousand barrels per day, so you're well over. You're talking about

a surprise. Last year, the surprise out of that sanctioned oil was well in excess of a million barrels per day, more than two x what you got out of the US. Also, remember natural gas prices were extraordinarily high last year. That reinforced even more US production. So you know, I mean, we'll see what's happening this year. So far, you know, the surprise is coming out of the US or nothing like what they were last year. And then when you look at places like Mexico, if anything, many of those

places are struggling to bring on their production. So yes, it was a factor of the last year. Is it something that we need to be conscious of? Yes, is it something I'm focused on, Yes, But is it derailed the story? I would argue that the increases in the sanctioned oil derailed the story far larger than what those other surprises that you're referred to did. And let's think about the cost of allowing that sanctioned oil to come online. You know, it had an impact on the Iranian hoodies,

you know. In fact, I thought the one that actually surprised me throughout this whole process was a British flagship carrying Russian material owned by Swiss trapp Era shot by an Iranian backed hoodie. If that's not, you know, emblematic of the problem, I don't know what it is. And then Venezuela similarly, you know, invading. They clearly focused on this because they've made the efforts to cut back on those you know, saying sinned oil. But it's not unlikely

to take effect until you go after the elections. But the bottom line, that was a lot of supply hitting the market at a time when demand was relatively weak as we're going through what we like to call is a mid cycle pause in the economy, meaning that if you look at that period in twenty twenty two and twenty twenty three. It was your classic mid cycle pause, huge run up in rates, energy prices. The system had

to adjust to the higher rates, higher energy prices. It slows down, and then it begins the second leg of the business cycle, which is where we are right now. By the way, never in the history of the post war era, as you go into that second half of the business cycle do commodities not act as the best performing asset class. And there is very little history that OPEC ever tames that price bike as you go in. They can't bring it on fast enough. So that's why

it's not as bullish as copper. And I'm not going to try to say it's as bullish as copper, but it is part of the overall story here, and you know, we never thought it was going to be as bullish as the base complex. But also when you look at these commodities supercycle, it's rare, whether if it's grain, softs, oil, base, precious, that these markets can get that far away from one another, because there's ultimately arbitrages across them.

we would create impediments to the demand growing. I don't want to get into the politics of that because they become relatively sticky. But I think the key point here is we have the tools at our disposal to get that demand down, but nowhere in the world is there the political will. And I think where I was really wrong on all of this is if we go back, let's say, twelve eighteen months ago, I fully overestimated the willingness of Western governments to pay for their politics, whether

if it was through sanctions, environmental policy. And I don't care which country wantn't you use? You can all come up where they loosened it. Yeah, I live here in the UK, and you know there's good examples there where they loosened it. But I think the key point point here is that when the going got tough and the cost of decarbonization became very apparent and very high, that

political will didn't carry through. And if we're serious about getting that demand down, which I firmly believe we should be. And by the way, I'm not going to demean the politics at all whatsoever here because I know they're really difficult, but that needs to be front and center before we're going to start to see a significant decrease in overall demand. And part of the you know, the reasons is people I know somebody who I'm not going to make it the name. They have one of the plug in hybrids.

They don't ever plug them in, and that's god has a very common problem. But if you want people to plug them in, make it expensive for them not to plug it in, then they'll plug it in. So I think we got a ways to go. But I think the key here is, you know, I actually point this out historically. I think I made this point when we were on last time. Is that historically when you got to get a tipping point where you actually see policy

really get serious about the problem. And when we think about the War on Acid Rain, it was the lake Erie effect nineteen sixty eight, lake Erie caught on fire. Richard Nixon had to respond. He created the Clean Air Act Amendment, the EPA. We went to town and we solved the problem. We used tools at our disposal which we've all learned in econ one on one, What do you do with the negative externality? You tax it, so

we know what to do. We just got to get to the point where the political will is there to do what we know how to do.

kind of cynical on the idea of dollar diversification. But it sounds like you think that the that's one of the things that's happening here, this idea that there are countries out there who are getting together and saying that we want to trade in our own currencies and diversify away from the dollar. How do you see that playing out?

because they don't want to create that concern. But I think the damage has been done because you don't see, you know, these countries are not trading in dollars anymore because of fear of what are they going to do with these dollars? And you don't see the Chinese, who actually still get substantial dollars lining up to buy US treasuries anymore. So again I don't want to get in the politics of this, but the question is, have we passed that point of no retur are we going to

see that recycling play out again? By the way, I don't think you need it to be bullish commodities, because what if they start taking those dollars in those rupees and everything else and just buying raw commodities with them, which is what they're doing with gold. We know they're doing it with gold. You know what if they start doing it with copper oil and other commodities and building strategic dog piles or something like that, it starts to

get pretty bullish again. But it's a very different dynamic than what we've seen in the past. And I would say, if you asked me really, what I got wrong was I don't know why I thought we would keep doing that dollar recycling dynamic be given everything that's happened. But that's one point where I would say that caught me really by surprise.

get some things wrong. And so it's really useful to go back and look at his lessons and kind of understand the framework for the way he thinks about things.

But one thing I thought was really interesting is some of the easing that he described that took place over the last couple of years, which is not like the sort of conventional easing as we think about it, but a little bit more stealth and so less sanctions enforcement, a little bit environmental regulation, yeah, a little bit more tolerance on environmental restrictions to minings and things like that,

things that don't show up. You know, no one comes out and really makes an announcement, Oh we're going to be lax on sanctioning.

making a difference in world oil markets. But then to Jeff's point, he was saying that he thinks actually the lack's enforcement of the sanctions was a bigger factor in all of this. But it's exactly right that, like we don't talk about it as much because it's not out in the open. You can't see those official statistics about how much oil supply is getting out of Russia. And same thing with environmental regulation as well. So I thought that was a really good point.

obviously we've talked about this a little bit before, but even with Russia's war in Ukraine, the sort of obviously arming Ukraine back in Ukraine, but you know, not being particularly excited about Ukraine's attacks on Russian oil facilities and the costs that that would add to the sort of overall global war effort. Like, it's sort of interesting to think about him saying he's been a little bit surprised by I guess the lack of will to take the painful part of the transition.

But if you think about acid rain, this was such a big talking point in like especially the like seventies, eighties, maybe even into the nineties. But nowadays, because of those regulations, acid rain has a lot less impact, at least places like Europe in North America.