G&R Q324 analysis

Copper and uranium: the coming divergence

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In this deep dive, we are going to analyze the Q324 commentary from Goehring&Rozencwajg, an American investment firm specialized in commodities, which always provides an interesting and groundbreaking perspective. In this case, they delve into comparison between copper’s and uranium’s perspectives and then review the markets for oil & gas, natural gas and precious metals.

Copper and uranium: the coming divergence

In recent years, copper has transitioned from being a conventional commodity to becoming an indispensable asset in any portfolio, particularly for investors prioritizing ESG criteria. This shift in perception is mainly due to copper's crucial role in the renewable energy sector, a connection that G&R began analyzing nearly a decade ago. Today, copper is considered the "greenest metal," and investments in renewable energy seem destined for exponential growth.

The current optimism about copper's future is supported by reports like S&P Global's The Future of Copper (July 2022), which has become a central reference for enthusiasts of this metal. According to S&P Global, the essential technologies for the energy transition—electric vehicles, charging infrastructure, solar panels, wind turbines, and batteries—will require significantly more copper compared to their fossil fuel-based counterparts. The rapid and massive adoption of these technologies, especially electric vehicle fleets, is expected to drive a surge in global copper demand. S&P Global estimates that copper demand will double between 2023 and 2035, rising from 25 to nearly 50 million metric tons annually, with approximately 17 million additional tons coming from renewable sources. These projections suggest an annual compound growth rate of nearly 6%, significantly higher than in the previous two decades. Consequently, structural deficits in the global copper market are anticipated by the mid-2030s, driven by rising demand and stagnant mining supply.

While these estimates are widely accepted, their long-term validity warrants scrutiny. Recent studies on the energy efficiency of renewable technologies compared to hydrocarbons and nuclear energy raise questions about the feasibility of a massive transition to these alternatives without compromising economic growth and living standards. This analysis suggests that optimistic forecasts for copper demand may be less robust than assumed, with significant implications for prices in the coming years. The prevailing narrative of a copper market driven by sustained growth in renewables could be overestimating both the adaptability of economies and the sustainability of projected consumption levels. If these expectations fail to materialize, anticipated structural tensions could lead to a sharper and faster adjustment in global copper markets.

On the opposite end of market dynamics, the uranium sector has experienced a remarkable revival since early 2018. After years of depressed prices following the Fukushima nuclear accident in 2011, uranium reached historic lows of $17 per pound. At that point, fundamental positive developments began to emerge, unnoticed by most investors. Since then, uranium prices have risen by over 300%, and companies like Cameco, the largest uranium producer in the Western world, have generated returns exceeding 550%, significantly outperforming the broader market, which grew by 150% over the same period. This resurgence reflects a shift in perception towards uranium, now recognized as an essential source of carbon-free energy, attracting interest from ESG-focused investors.

Despite renewed optimism, investments in uranium and copper deserve deeper analysis. While short-term prospects remain bullish, there are fundamental reasons to believe uranium could outperform copper as a more profitable investment over the next decade. The best framework for evaluating the viability and prospects of renewable energy (as a proxy for copper demand) and nuclear energy is the Energy Return on Investment (EROI). Renewables like solar and wind energy have low EROIs ranging from 5:1 to 15:1, while hydrocarbons and nuclear energy achieve significantly higher ratios, around 30:1 and 100:1, respectively. Emerging technologies such as small modular molten salt reactors (SMRs) promise to increase this ratio to 180:1, offering a much more efficient and sustainable solution.

The importance of EROI is illustrated by historical examples such as the adoption of the Boeing 707, which revolutionized air transportation in the 1950s due to its superior energy efficiency. Conversely, the Concorde, despite being a technological marvel, failed commercially due to its high energy consumption. This parallel underscores that energy efficiency outweighs advantages like speed or innovation—a principle applicable to the debate between renewables and nuclear energy.

In the case of uranium, SMRs represent a groundbreaking advance. Unlike traditional pressurized water reactors, SMRs operate at atmospheric pressure, reducing the need for heavy materials like steel and concrete by 80%. Additionally, they use HALEU (20% enriched uranium), which decreases radioactive waste by 90%. These features not only enhance energy efficiency but also address historical safety issues, such as risks of leaks and explosions associated with high-pressure reactors.

Meanwhile, renewables face significant limitations. Despite the dominant narrative about their role in the energy transition, their low energy efficiency and dependence on government subsidies make them less competitive. Countries like Germany have invested heavily in renewables, gradually phasing out nuclear energy, but the results have been problematic and disappointing. The lack of efficiency has led to high energy costs, slowing economic growth and affecting key industries.

In this context, optimistic projections for copper, tied to the expansion of renewables, may be overstated. The adoption of low-EROI technologies poses significant risks to economic stability and emission reduction goals. If these expectations do not materialize, the copper market could face a correction, while uranium, supported by stronger fundamentals, may emerge as a safer and more profitable option.

Proceed with caution.

Oil: the depletion paradox

The production of shale oil and gas in the United States appears to be nearing its final act. For years, G&R have predicted that sustained shale growth would peak by late 2024 or early 2025—a forecast that, in hindsight, may have been overly optimistic. Recent data from the Energy Information Administration (EIA) confirm that both shale oil and dry gas production peaked in November 2023. Since then, oil production has declined by 2% (approximately 200,000 barrels per day), while dry gas production has fallen by 1% (about 1 billion cubic feet per day). According to their models, the decline slope is expected to steepen in the coming months.

Despite this data, the prospect of sustained decline faces skepticism. Many industry players believe the drop is temporary and that higher prices or deregulation under the incoming administration will revive drilling and boost production. However, this optimism overlooks the primary driver of the decline: geology. The limits of depletion are imposing constraints that neither policies nor prices can overcome. Although the incoming administration's team includes knowledgeable figures like Chris Wright and Scott Bessent, whose efforts may foster a favorable environment for drilling activity, these measures will not suffice to counter the entrenched downward trends in the sector. Shale's geological reality has already delivered its verdict.

The analysis is grounded in the work of Dr. M. King Hubbert, who accurately predicted the peak of U.S. conventional crude oil production in 1970. Applying his theoretical framework, combined with advances in artificial intelligence and machine learning, models have been adapted to address the complexities of shale production. This approach enables more precise analysis of how geological limitations are shaping the current decline.

Historically, the parallels are clear. During the 1970s, conventional crude production peaked despite an unprecedented increase in rig counts and a price surge from $3.18 to $34 per barrel. While the industry responded vigorously to these signals, production continued to decline. This reinforces what is known as the depletion paradox: higher prices and increased drilling efforts cannot overcome the geological reality of finite resources. Today, the shale sector faces a similar crossroads. While its achievements have been remarkable, the forces of depletion are inevitable. The industry, Wall Street, and policymakers seem destined to repeat past mistakes, believing that growth can outpace geological constraints. The historical lesson is clear: enthusiasm for growth, however well-intentioned, cannot overcome fundamental geological limitations. Ignoring these lessons not only leads to disappointment but also to the painful realization that neither higher prices nor bold policies are sufficient to address the relentless advance of depletion.

The logistic curve model has proven to be an exceptionally predictive tool for oil and gas production. However, its effectiveness has often been questioned due to a lack of clear explanation as to why it works. This uncertainty has fueled criticism of the model and rejection of the "depletion paradox" concept. The underlying question remains: if higher prices and new technologies can accelerate extraction, why does depletion persist as a limiting factor?