Alma Recurrent Global Natural Resources Fund

Market Review and Outlook

Portfolio discussion

In June 2021, the Alma Recurrent Global Natural Resources strategy fell by 2.96%, underperforming the S&P Global Natural Resources Index’s 2.29% fall. During the month, portfolio holdings in the copper, aluminum and steel sectors all fell more than the benchmark, after significant outperformance during the course of 2021. Stock selection in the energy industry added to performance, as WTI oil prices ended the month above $70/barrel.

Investment Discussion

In our 2017 white paper titled “From Gasoline to the Grid”, we analyzed the burgeoning electronic vehicle market. In it, we looked at the importance of cost factors to determine increases in market share. Additionally, we looked at potential scarcity of two important components – lithium and cobalt – in electric batteries which could inhibit widespread growth.

While widely used in a variety of applications, copper also plays a prominent role in the energy transition. In a conventional internal combustion engine vehicle (ICE), approximately 50 pounds of copper. In comparison, approximately 180 pounds of copper are used in a typical electric vehicle. While not necessarily a large impact on the global copper market at current market shares for electric vehicles, it is worth considering the impact of electric vehicle market share growth on the copper market.

In 1Q 2021, research firm Canalys estimated that 3.1 million electric passenger vehicles were sold in 2020 comprising approximately 5% of global market share. Compared to ICE vehicles, electric vehicles added 185,000 metric tons of global copper demand in 2020 (3.1 million cars x 130 pounds per car). This compares to annual global copper consumption of approximately 20.7 million metric tons, or 0.9% growth due to the switch to electric vehicles.

According to Bloomberg Analysts, despite COVID, 2020 global copper demand grew approximately +0.8%, nearly entirely attributable to incremental demand from electric vehicles. However, since 1961, annual copper demand has averaged roughly +3%, which is likely augmented by electric vehicles and grid electrification.

At this point, incorporating some learnings from our previously mentioned white paper helps to frame the demand outlook for copper. In 2017, we identified that EVs could account for 20-30% passenger vehicle sales before supplies of cobalt and lithium could face meaningful bottlenecks. If we extend the same consideration to copper, then global copper demand would increase approximately 3.6% per year, just from electric vehicle sales (if 5% market share = 0.9% copper demand growth; then 20% = 3.6% demand growth)

While extended periods of above average demand should be generally be supportive of strong copper prices, looking back to find relationships in the historically relevant inflationary period in the 1960s-1980s can also provide insight. As seen in the chart below, during the period, changes in copper prices showed a fairly strong correlation to changes in copper demand. More specifically, in the 5 years between 1963-1982 where demand exceeded 5% YoY growth, the average increase in copper prices was 21.6%.

Compared to long term average copper demand growth of 3%, increases in electric vehicle market share will further add to growth prospects. The likelihood of >5% YoY annual copper demand growth grows with each increase in electric vehicle market share. As such, if the inflationary 1963-1982 period is a guide, the potential grows for >15% YoY price increases.