Glencore (LSE: GLEN) shares have been on a tear of late, with the stock up 20% in the last month alone. What makes the move even more remarkable is that it has occurred against a backdrop of ongoing weakness in coal prices, the miner’s largest revenue generator. But the stock’s rise reflects a growing awareness among investors of its transition-enabling commodities, most notably copper.
Commodities cycle
What I think many investors misunderstand about commodities is that they tend to move in interconnected cycles. In the aftermath of Covid, a number of commodities shot to the moon. These included ammonia, oil, coal, orange juice and sugar beet.
Last year, gold made its big move. The thing about gold is that it is easy to understand the investment case for owning it. That makes it a less risky asset to have in one’s portfolio. Yet this year the big move has not come from gold, but from its cheaper cousin, silver.
This fact is extremely important, to my mind. Silver is a much more volatile metal. The fact that investors are becoming increasingly interested in owning it, demonstrates an acceptance of increased risk-taking. That in turn gives me a signal that this commodities bull market is now beginning to heat up.
Price discovery
As investors move up the risk curve, copper is now joining the party. Like silver, copper is notorious for being volatile. Only last week the red metal saw its biggest weekly gain in a year.
The reason behind the explosion in prices is down to a number of inter-related factors. Firstly, ongoing weakness in the US dollar, in the face of inflationary pressures and tariff uncertainties. This has made owning hard assets more important.
Secondly, supply disruptions from Chile. That country is to copper what Saudi Arabia is to oil.
Finally, robust demand.
Demand
I have never been more bullish on copper than I am today. ‘Doctor Copper’ is so named because price signals in the market provide invaluable insight into the health of the global economy. Higher copper demand tends to mean a healthy economy. However, recessionary indicators abound but copper prices are actually rising.
The reason to me is simply down to an explosion in demand due to AI. The hyperscalers such as Microsoft, Meta and Alphabet are spending tens of billions of dollars building up their data centres.
Electricity consumption in the US is rising exponentially. So much so that utility providers have been passing on inflation-busting price hikes to end consumers. The reason for the price rises is increasing demand coming from power-hungry data centres.
Coal
Glencore’s achilles heel remains weak coal prices. At its H1 results back in August, it reported a 17% decline in earnings before income tax, depreciation and amortisation (EBITDA). The miner views coal as a pivotal part of its medium term strategy.
Its buyout of the Teck Resources significant steelmaking coal business in 2024 is a gamble that has yet to pay off. If prices do not pick up, then the miner will continue to be a loss-maker.
Nevertheless, Glencore’s growing copper portfolio remains the main attraction for me. The business continues to buy back record amounts of its own shares, and I have been following its lead with my own share purchase recently.
