A major copper trend

I’m spending a few days in the Baltics to review how things have changed since I was last here over the summer.  This region was among the hardest hit in the world, and as I have stated numerous times, I’m convinced it will end with a devaluation in Latvia.

The big news of the day here is that Lithuania’s main nuclear reactor, which supplies the preponderance of this small country’s electrical needs, is being forcibly decommissioned. 

As part of their agreement to enter the United States of Europe (EU), Lithuania had to agree to destroy the plant, effectively ending the only sliver of energy independence it had.

Now the country must rely on power from Poland, Sweden, and those all-too-reliable Russians.  Problem is, most of the infrastructure that will carry the load hasn’t been built yet, and even when it does, it’s unclear if there will be enough excess capacity for Lithuania to import.

My friend Gianni Kovacevic , a successful investor whom I have discussed before in this letter, recently sent me an email along the same lines.  Gianni is an incredibly sharp mover and shaker in the Vancouver resource scene, and he’s also quite bullish on copper.

He sees a coming surge in demand for electricity and thinks that most of the world is now scrambling to keep up with demand: 

Simon,

Like you, I travel all over the world… and based on what I am seeing around the world, I wanted to write you a quick letter to address some major trends that I am seeing as they relate to copper.

It’s a scientific fact that electrical energy requires copper for conduction and transmission. Anything electric has copper, and the more ‘major’ an electrical appliance, the more copper it contains.  A window air conditioning unit, for example, contains about 15-20 pounds (7-9 kg) of copper, including the tubing, wiring, motors, etc. 

Now think about Russia.  It wasn’t even 7 or 8 years ago that there were hardly any air conditioning units in an average Moscow apartment building. This has now changed entirely; as you can see in the picture I’ve attached, virtually every window has a split A/C unit.

photo__1_moscow_complex

Obviously, this creates significant demand for copper… and even if copper climbs to $8 per pound and the entire unit cost $100 more, would that prevent anyone from purchasing comfort in the summer heat? Probably not.  

More importantly, though, consider what could take place in city after city due to the lack of an advanced electrical grid.  All of these new electrical appliances– air conditioning units, refrigerators, freezers, space heaters, computers– are power hogs.

Moscow, with a three-month summer, had every other citizen buying, installing, and living with air conditioning, albeit for only 3 months each year.  This creates a major problem for utility companies in developing countries that have been deficient in generating capacity. 

With just one heat wave each year, many nations’ electrical systems will face catastrophic failure as we saw a few years ago on the Eastern seaboard, and just a few weeks ago in Brazil. 

In response to this energy threat, Russia and Ukraine now have two of the largest planned nuclear power expansions in the world.  Other countries are also building multiple megawatt projects at an unprecedented rate. 

The US will be expanding its own electrical infrastructure as well, installing a new “smart” grid for all the new green, clean electrical plants.  As many other countries never even installed the first generation electrical systems, though, they are now efficiently leapfrogging to the most modern power balancing systems.

Sure, it’s true that items are becoming more energy efficient. But consider that in 1980, the average US home had 3 electronic gizmos.  Today it has 25!  Many of these items are not regulated to be energy efficient, thus certain items like plasma televisions are still power hogs.

Homes all over the world are now starting to resemble the average western household, plasma screens and all. For whatever reason there are a few naysayers who ‘don’t believe’ this trend, but I wouldn’t listen to stories on this subject from anyone that doesn’t have stamps in their passport.

Facts are facts and the reality is that just about every place on the planet is using more electricity today than 20 years ago, 10 years ago and even a few years ago.  As the developing world plays catch-up, their power needs are really outpacing the west.

All of this– from the appliances to the electrical generation to the grid expansion– requires copper.  Global appetite for the red metal has grown annually by 4% on average for the last century. Sure there may be corrections, but long-term demand is clear.
 
The Chinese are now all over the globe in a silent economic war, securing and trading their dollar reserves for long-term supplies of commodities they need. No oil, no steel, no copper, no growth, and that simple truth is exacerbated by the never-ending ascent of man.

All of these facts are paving the way for a long-term bull market for all commodities.  While prices won’t move straight up or down without correction, higher average commodity prices will continue to baffle and confuse pessimistic permabears who have little first hand knowledge of basic electricity and way too much Sino-phobia. 

Simon again. I agree with Gianni, and while there may be a short-term technical correction soon, our on-the-ground observations suggest that the long-term outlook for resources is very bright. 

Aside from resource stocks that Gianni personally recommends to me, I’m considering long-term futures contracts and options on futures (similar to my July silver trade that is up over 300%).

Share this article

About the author

Stay in the loop

Get our new Articles delivered Straight to your inbox, right as we publish them...

0 Shares
Share via
Copy link