The market’s knack of quickly losing interest in megatrends creates opportunities for patient long-term investors who can capitalise on short-term volatility.
Consider Electric Vehicles (EVs). A few years ago, the market couldn’t get enough of the EV story. Tesla was at a record high, lithium stocks boomed and hype about green minerals peaked.
In 2022, interest in EVs began to wane as consumers worried about the lack of charging infrastructure, ‘range anxiety’, higher insurance costs and poor EV re-sale values. For some, EV drawbacks outweighed their environmental benefits.
Some experts I know believe the EV boom is rapidly fading as more consumers prefer hybrid vehicles over EVs. Their view is supported by strong growth in hybrid sales in Australia over the past year and slower-than-expected growth in EVs.
If the EV bears are correct, commodities such as copper and lithium –beneficiaries of the EV boom – have further to fall. But I regard current weakness in the lithium and copper price as an opportunity for long-term investors.
To be clear, both commodities face near-term headwinds. Investors hoping for a quick recovery will be disappointed. China’s struggling economy is bad news for copper demand and doubts over EV growth are bad news for lithium in particular.
Copper hit a two-week low this week amid weak economic data from China. Renewed concerns about US growth have also weighed on the metal.
Commentators, however, usually focus more on short-term conditions affecting commodities demand and less on long-term issues affecting supply. The next chapter in the commodities super cycle will be driven by supply, not demand.
Start with copper. In its FY24 result, BHP Group offered a cautious near-term outlook for copper while reaffirming its view that copper is headed for supply shortages and a higher price this decade, amid the energy transition.
BHP, one of the world’s largest copper producers, has an obvious interest in promoting the metal’s long-term prospects. But BHP’s strategy to invest more in its copper portfolio and ramp up production is a smart move.
Copper is becoming harder to discover and costlier to mine. Few new major mines are in the pipeline. Like other commodities, copper production has faced rising costs and problems due to mine strikes in Latin America.
As a new wave of demand for copper from renewable energy, data centres and power-grid expansion occurs later this decade, copper supply could struggle to keep up. That’s good news for the copper price and copper producers.
Lithium has similarities to copper. Sharp falls in the lithium price in 2023 have encouraged local and international lithium producers and processors to reduce supply. Like copper, lithium is becoming costlier to mine, and current supply cutbacks will coincide with rising lithium demand in the medium term amid the energy transition. That should support a recovery in the lithium price.
For all the short-term negativity due to demand factors – notably slowing Chinese growth and disappointing EV growth – the long-term outlook for copper and lithium remains positive, principally due to the likelihood of constrained supply as few new mines are developed or expanded.
Investors in both commodities will need patience. A recovery in both commodities will take time and not occur in a straight line. This idea is for long-term investors who have at least a five-year outlook and can tolerate short-term volatility.
Investors seeking exposure to copper and lithium could consider ASX-quoted Exchange Traded Funds (ETFs). The ETFs are useful tools for those seeking broad, diversified exposure to a long-term recovery in both metals.
- Global X Copper Miners AUD ETF (ASX: WIRE)
WIRE provides exposure to a basket of 39 local and international copper miners. The index WIRE tracks the world’s largest copper producers: First Quantum Minerals, Teck Resources, BHP Group and Southern Copper Corp.
Launched in November 2022, WIRE has slumped from a 52-week high of $16.05 to $11.85. The ASX-quoted ETF has given back almost all of its strong gains from the first half of 2024.
The weakness seems unlikely to abate anytime soon. China has mounting economic headwinds as its property crisis intensifies. Growing concerns about EV demand are another headwind for copper demand. Copper is a key component in EV wiring, motors and charging infrastructure.
That’s the bad news. The good news for prospective investors is that valuations for key copper producers have retreated in the past few months, reflecting the metal’s constrained near-term outlook.
In the medium term, improving global economic growth will support ‘Dr Copper’ and its leverage to industrial demand. Longer term, rising demand for copper due to the energy transition (which is vastly broader than EVs) and constrained copper supply will underpin the next leg of growth in the copper price, earnings for copper miners, and valuations for leading copper producers.
WIRE is unhedged for currency movements and has an annual fee of 0.65%.
Chart 1 Global X Copper Miners AUD ETF (WIRE)
- Global Battery X Tech and Lithium ETF (ASX: ACDC)
I touched on ACDC in this column last month and also highlighted the BetaShares Electric Vehicles and Mobility ETF (DRIV), which has edged higher in the past few weeks despite growing EV negativity.
To recap, ACDC invests in companies throughout the lithium cycle, from upstream producers to downstream refineries and battery producers.
ACDC rallied from about $43 in early 2020 to about $100 in mid-2023, amid investor euphoria in battery technology and materials companies. ACDC has since slumped to $76.96, amid waning interest in lithium producers.
The best time to invest in an asset is usually when the market stops talking about it or gives up – due to the short-term focus of many investors and irrational sentiment. That will be true of lithium as its recovery plays out over this decade.
I wrote last month that investors who missed the rally in lithium first time around could consider ACDC, which provides concentrated exposure to 34 global lithium-related companies. I retain that view, despite rising bearishness towards EV demand and thus demand for lithium for EV batteries.
The collapse in lithium has priced in market disappointment with EV demand – and then some, creating an opportunity for long-term contrarians.
ACDC is unhedged for currency movement and has an annual fee of 0.69%.
Chart 2: Global Battery X Tech and Lithium ETF
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 4 September 2024.
