There has been quite a bit of talk about the looming demand crunch for EVs due to economic malaise (the Elon, among others)

Previously, the conversation has all been about supply side constraints. Clearly, the price of basic material miners, processors and end product manufacturing companies is going to be effected by this.

I have never bought into ASX:WIRE (a copper miner ETF), Tesla, or ASX:ACDC (an electrification themed ETF with a fair bit of lithium miner exposure). Mostly, because I saw all of these suffering from the first stage of investor mania, with extrapolation into a perfect future - this was never going to be realistic.

We are now likely entering the second phase of investor behaviour with new technologies: disappointment. Critical mineral prices are all heading south, Tesla is forecasting a slump in sales, and their margins have been repeatedly cut; the above ETFs have reflected that disappointment:

WIRE

ACDC

My thinking is; now is the time to start doing some more in depth research as to how to play the disappointment wave. This period of disappointment may well last a few years (who knows) and will have numerous factors pushing and pulling on it, not least all the Macro and geopolitical tensions that are front of mind, but one thing is certain, that in the long run these sorts of plays are extremely likely to pay off.

The other factor holding my hand, has been trying to "pick winners" at the beginning of this new technological phase. The example that usually gets trotted out here is that of the internet in 1998-2002. How many of those companies that were thought to be long term winners are around now - not many.

Here is a podcast and an article from the economist which has really helped inform my thinking and would recommend them to anyone who would like to look into this in more detail:

Doctors are famously reluctant to hang up their stethoscopes. But a time comes in the career of every medic when their skills fade, and a gentle push is the best thing for them—and their patients. The same applies for the metaphorical physicians of the financial world, whose ability to diagnose the market’s health changes over time. Now the end may be nigh for the most illustrious of all such physicians: Dr Copper.

Copper, a metal crucial to the construction of all manner of fittings, pipes and wires, has earned its nickname on Wall Street owing to its role as a bellwether for the health of global industry. A surge in copper prices is taken as an early sign of an economic upswing; a big drop is a portent of recession, or at the very least a manufacturing downturn.

So what is going on at the moment? Manufacturing looks peaky. Global industrial output is up by just 0.5% year on year, well below the average of 2.6% over the past two decades, and the rich world is in an industrial recession. A wobble of a similar scale in 2015 sent copper prices plunging by about a quarter. Yet so far this year they are down by only 6%. Futures maturing in 2025 are flat, and those maturing in 2026 are up a bit.

The breakdown in the usual rules of thumb is most striking in China, which consumes over half of the world’s annual copper supply. Its stricken housing market might have led you to think the metal was doomed. After all, investment in property, once a key driver of copper demand, is down by 9% year on year. Curiously, though, Chinese demand for the metal is up by around 10% this year.

The explanation for this lies in the radical shifts that are under way in the energy system. China will install around 150 gigawatts (gw) of copper-intensive solar-energy capacity this year, according to Goldman Sachs, a bank, almost double the amount it installed last year. And methods for storing energy require the metal, too. Pumped-storage hydropower is one example. This involves moving water from one reservoir to another, either to hoard excess energy from wind and solar power or to release it. China already has 30% of the world’s hydropower-storage capacity, at 50gw. Another 89gw of capacity is being built, which will require vast amounts of copper.

Other countries are also spending big on the green transition, and putting in place legislation that will increase appetite for the metal. s&p Global, a financial-data firm, suggests that demand for refined copper will almost double by 2035, to 49m tonnes. Batteries, energy transmission, solar cells, transport—all need the metal. An electric car contains over 50 kilograms of the stuff, more than twice the amount used in a conventional vehicle. Across the world new rules, intended to reduce emissions, will steer consumers towards electric vehicles and away from their copper-light predecessors. In Europe sales of new petrol-powered cars will be banned from 2035.

The squeeze on supplies will therefore be historic, meaning that sky-high copper prices will no longer be indicative of optimism on the part of industrial machinery-makers, construction firms, electronics manufacturers and the like. Instead, rising demand for copper will increasingly reflect a desire among politicians for more environmentally friendly energy, and sometimes also a reduced dependence on imports.

In normal times, building an electrical network from scratch would at least be a signal of greater economic activity to come. However, the energy transition is intended to replace existing activity, rather than add to it. In the case of energy infrastructure, China’s new solar investment this year can generate 150 gigawatt-hours of energy when working at full pelt, which is equivalent to almost 90,000 barrels of oil per hour. That is energy which China now does not need to purchase from overseas producers. The result may well be good for the planet, but it will not have much effect on aggregate economic activity.

With so much of the growth in demand for copper locked in, and proceeding in large part according to legal diktat, the metal’s price will over time say less and less about the state of the global economy, and more and more about the state of the energy transition. Copper prices will still be worth watching, then, albeit for different reasons. Investors wanting a hint about the state of the global economy will be replaced by policymakers wanting a sense of how their green policies are faring. Dr Copper’s retirement may be a sad moment, but it is not the end of the story. 

https://podcasts.apple.com/au/podcast/economist-podcasts/id151230264?i=1000632607801 - HOW TO AVOID A BATTERY SHORTAGE.

My takeaway from this is that copper is likely to be the least risky play; there are multiple new battery types in development, increased efficiencies in critical minerals usage and recycling of them may well reduce demand of the current obvious candidates (Lithium, cobalt, nickel, vanadium) and copper is unable to be replaced for the wiring of EVs, the massive grid re-structuring and satellite battery solutions (homes, businesses etc).

The risks are a) timing, b) investment selection and c) confounding factors (see article above regarding the other multiple use cases of copper which can affect its price, most notably the moribund Chinese housing market).

There is pretty much universal agreement that there is a huge supply deficit coming due to the fading production of current mines and the long lead time to bring new sources on-line (was 7 years, now 15)

I am leaning towards a simple exposure using the WIRE ETF, or perhaps RIO/BHP but would appreciate anyone else's thoughts on the subject.

C