Aluminium…the copper grid alternative

Thursday, 2 May 2024

Twitter (X): @JCooperGeo

[6 min read]

Dear Reader,

From your humble drink can to the airframe of an F-16 fighter jet, aluminium’s role in the global economy is diverse and critical.

Like copper, aluminium is used in established industries, such as manufacturing and housing construction. Yet, it is also leveraged to growth sectors.

With superior corrosion resistance, aluminium is widely used in solar installations.

Here, it’s used in frames, wires, and support structures.

According to some sources, the ability to withstand the elements gives aluminium a service life exceeding 70 years.

Corrosion resistance also makes it ideal for offshore wind farms…tower platforms, transformer stations, and turbines are all made from aluminium.

For these reasons, the United States and the European Union have classified the metal as a critical mineral.

Yet, one of the biggest growth drivers could come from the mass build-out of the global power grid.

Few have considered the LIMITATIONS of the existing energy grid in the relentless move toward renewables.

However, this is the critical link connecting power generation to the end consumer, and aluminium is set to play a crucial role.

Power grid upgrade…it’s not all about copper

You might be surprised to learn that aluminium is already widely used in power grid installations as an alternative to copper.

This is not a new phenomenon.

The decision to find an alternative to copper dates back more than 80 years, taking shape in the early days of WW2.

At the time, the copper supply was being funnelled into manufacturing shells, bullets, and other war munitions. Recycling wasn’t an option—copper was being blown out of the circular economy!

In desperation, the US began minting steel coins to divert more copper to the war effort.

With the stakes high, engineers were tasked with testing an alternative metal—a metal with similar conductive properties…aluminium offered a viable alternative.

After passing initial trials, aluminium was incorporated into power utilities and other electrical wiring, including homes and factories.

Although up to 40% less efficient than copper, aluminium can conduct electricity long distances. Since then, aluminium has continued to play an important role in energy transfer.

That leads us to an important question…could mass global electrification drive strong demand for aluminium?

Electrification and the aluminium opportunity

Aluminium doesn’t receive as much attention as its high-profile base metal cousin, copper. Yet, it does share similarities.

Note the strong correlation between aluminium and copper prices, below:

While copper has fared better since coming off the resource-wide peak in 2022, both metals appear to be marching to the beat of a similar drum, gaining strong momentum in 2024.

Like copper, interest is picking up for this base metal.

According to the International Aluminium Institute, demand has been forecasted to grow by 33.3 million tonnes over the next decade. Rising from 86.2 million tonnes in 2020 to 119.5 million tonnes in 2030.

Around 37% of this growth is expected to stem from China, through manufacturing, construction, and the country’s ambitious power grid upgrade to accommodate electrification.

And like copper, SUPPLY will play a critical role in this investment opportunity.

Understanding the supply dynamic

Aluminium ore, known as bauxite, is not typically rare.

The formation is similar to laterite nickel deposits, where high volumes of rainfall remove ‘mobile’ elements from the soil, leaving behind a natural concentration of the less mobile elements.

That includes nickel, iron and aluminium.

Copper deposits, on the other hand, form via the mineralisation of primary ore deposits deep below the surface, making them harder to find and more expensive to extract.

That’s why, pound-for-pound, the per-unit value of copper will always exceed that of aluminium.

While bauxite deposits are relatively common, supply problems emerge at the processing level.

You see, aluminium production is energy intensive. About 17,000 kWh of electricity is required to produce just 1 tonne of refined metal.

Rising energy costs can impact supply, that’s what we witnessed across Europe in 2022.

As war broke out in Ukraine and Putin restricted gas supplies, energy prices spiked. In response, aluminium smelters slowed operations and curtailed output.

So, where’s the investment angle?

Given that bauxite is relatively common, the upside for miners may be limited.

Similarly, unless refiners have access to a cheap energy source, companies will be hostage to higher operating costs.

Investing in a dedicated aluminium ETF could be the most strategic option for gaining upside here.

Usually, I levitate toward stocks, but given the added risks, ETFs could offer the best opportunity. That’s not to say there aren’t company-specific opportunities though.

My Diggers and Drillers service recently uncovered a stock in the specialised high-purity alumina (HPA) market. HPA is a purified form of aluminium with specialised applications.

If you’re interested in finding out more about the emerging HPA opportunity, you can do so here.

Regards,

James Cooper,
Editor, Mining: Phase One and Diggers and Drillers

James Cooper has been a working geologist in mines across Australia, Canada, and Africa since the early 2000s. He’s led the operations of tiny explorers through to huge producer outfits. He’s seen booms and busts firsthand and he also understands the cyclical nature of individual commodities. For example, James was right there when Barrick Gold launched an enormous $7.5 billion takeover bid for Equinox. That was the peak of the last cycle.

With his background as a geo and finance professional, he brings a unique insight and experience to Fat Tail Investment Research. He writes the broader resource-focused investing letter Diggers and Drillers and the ultra-speculative explorer-focused trading service Mining: Phase One.

[3 min read]

‘During the episodes of financial chaos that occasionally erupt in our economy, we will be equipped both financially and emotionally to play offense while others scramble for survival.’

Warren Buffett

Here, we are in Maximum Safety Mode. Why?

Like Buffett, we suspect that a period of financial chaos is coming. We want to be ready for it.

The Primary Trend has turned down; it could last for many years. As prices sink, there are bound to be crises.

But we don’t have to predict anything; we just have to notice that stocks are expensive. The S&P is selling at a CAPE ratio of 34. That’s twice the average price for stocks — in the 97th percentile historically.

This suggests that stock prices could be cut in half, just to get back into a ‘normal’ range.

Our Dow/Gold ratio, too, tells us that stocks have a long way to climb down. The ratio is usually around 10. Now, it’s 16.5. Stocks will have to lose about 40% of their value to get down to the average.

But markets do not simply go to ‘normal’ and stay there. They swing from over-priced to under-priced...and back. Right now, stocks are on a downswing (or so we believe) of unknown magnitude. But since the feds pushed the last Primary Trend to an extreme...

...and since they now seem to be pushing this one to an opposite extreme...

...the coming period of chaos should be a doozy.

Our model tells us to stay put in safety mode until the Dow/Gold ratio falls to five or lower (when you can buy the entire list of 30 Dow stocks for the equivalent of five ounces of gold). At that point, it will be time to channel our inner Warren Buffett and ‘play offense while others are scrambling for survival’. Like Buffett, we are hoarding cash…(in our case, precious metals and dollars).

In the meantime, we continue to marvel at the astonishing ways in which the feds make a bad situation worse. This just in from the DailyHODL‘

'US National Debt Surges $273,859,000,000 in Two Months As Billionaire Leon Cooperman Warns Nation Heading Toward Financial Crisis’

Cooperman:

‘You have no idea when the stuff hits the fan... If deficits don’t matter as some people insist, then I’m being too conservative. But deficits matter... I think we’re heading into a financial crisis in this country.’

Colleague Dan Denning adds:

‘The Treasury announced it would be borrowing $243 billion in the April-June quarter and $847 billion in the following quarter. That means the government's annual deficit will probably be much larger than the current projections of $1.5 trillion. The second quarter figure is $41 billion larger than they figured in January. But these days, what's $41 billion in the context of $35 trillion?

‘Demand for longer-term bonds has been weak. So everyone is expecting the Treasury to announce a mix of Bills and Notes. Shorter-term debt. But it means that everything sold at a shorter maturity has to be refinanced sooner as well.

‘Wouldn't want to be Janet Yellen this week. Or ever, really.’

It is obvious to everyone that adding debt at this stage will lead to trouble. Big trouble. Soon, we will hit the doomsday trigger — with debt at 130% of GDP. 51 times out of 52, when the trigger level was hit...the system blew up. But maybe this time it won’t.

We’re special, aren’t we? We’re the indispensable nation, no? The normal rules don’t apply to us, do they?

Tomorrow...we’ll try to figure out why policymakers seem to be aiming for chaos. We’ll also look at another ‘trigger’ point just revealed in a Goldman Sachs study. It could be hit any day now. And when that happens, stocks go down.

What? You say stocks are already going down? The Dow went down more than 570 points yesterday? But you ain’t seen nuthin’ yet. Nobody is ‘scrambling for survival’. Not yet. And when they are, we don’t want to be among them.

Stay tuned.

Regards,

Bill Bonner,
For Fat Tail Daily