Copper, chaos and contrarian thinking | Fast Forward podcast season 3 episode 1 transcript 

Full episode transcript

David Lilley [DL]: I am Dave from London who is just speculating on what the US government may or may not do. I have no idea.  

Andrea Hotter [AH]: Welcome to Fast Forward by Fastmarkets. I’m Andrea Hotter and we are back for season three Today we are joined by David Lilley, somebody who has spent a lifetime in the copper market. He spent years at Cargill, Philip Brothers Metal Gazelle Shaft, and Enron Metals. 

You may know him as a founding partner of Red Kite. And he’s now the director and co-Chief Investment Officer of Drakewood Capital Management. Quite honestly, he’s forgotten more about copper than most of us will ever know. He’s seen the shifts in the cycles, policy and supply shocks, the whole arc of how this market actually works. 

So with that, let’s bring him. 

David Lilley, welcome to Fast Forward. How are you?  

DL: Hi. I’m very well, and thank you for having me.  

AH: Oh, well I’m thrilled that we could get you on the show. We have known each other a really long time and talked about copper over the years, so it’s great to get you here.  

DL: Yeah, I don’t think we should actually admit the number of years. It’s a little bit too many now, but anyway.  

AH: I know. Well, once we get going, it’ll probably become quite obvious, I would imagine. But here we go. I do remember one conversation really standing out actually, and it was back in 2005 when I distinctly remember you telling me that the copper market was about to go through seven years of feast, followed by seven years of famine. 

And you know what? You were spot on. We had a bit of a feast from 2005 with the supercycle that peaked out in 2012. Then we saw seven years of famine and then another feast in 2019. So by your maths and on that cyclical thesis, it’s 2026.  

DL: Yeah, we’re getting near the end.  

AH: Yeah. Are we on the verge of another famine? 

DL: I don’t actually think so. I genuinely don’t think so. But then again, I do have an inherent bias. I would say that given that the excitement in the copper market is good for our business, uh, I do probably have that bias and I would, as we get into talking about this, I would say it’s probably a little bit more nuanced at the moment than perhaps it has been over a little while. 

But the big picture, long-term themes, I think still remain very supportive. So I think we’ll extend it to 12 years of good years. I would also, or maybe, well, I don’t know what else. I’d maybe just need to fix the recount. I need to fix the years and, uh, add a, add a and start with counting in a different place. 

AH: Rewrite the cycles. Well, I guess that brings us to what’s really driving prices today then, because the global political and economic backdrop is quite extraordinary at the moment. Venezuela wasn’t on my bingo card at the start of the year. You’ve got massive fragmenting of multilateralism, an explosion of trade tensions, a very slow dismantling of the world order. 

The list goes on and on and on. So when you strip away the headlines. Do you think copper is being driven more by the fundamentals, supply and demand, or by the fear, the uncertainty in traders just reacting to what might happen in that volatile and uncertain world that we’re seeing?  

DL: I think that’s a very good question, insofar as I think that those factors are very important. 

So historically I would’ve said that copper was a relatively pure commodity market being influenced by its own supply demand fundamentals. If there wasn’t enough of it about it went up, and if there was too much of it around, it went down. And whilst it did care about macro themes, that was more in so far as they affected short term demand. 

So if there was a crash, then fine. Okay, copper demand goes down fine. These days, I think copper has to take into account all of those change situations and they are almost all relevant and we should talk in a bit more detail, but they’re almost all relevant to the copper price. I’m happy actually to work through some of those. 

AH: Yeah, let’s go through them then.  

DL: So if I first say about deglobalization, the world has been a globalized world. The whole “Chimerica” model was how we were working, designed in California, built in China. Fine, all work. Well, it’s very tempting to say, oh, this is just Mr. Trump. It’s not. It’s been happening for a while. The inherent contradictions of being a major economy without a manufacturing industry have become clearer and clearer to certainly the leaders of America, and I think latterly the leaders of Europe as well. And what that means is that industries are now having to focus on instead of just an optimization problem where everything’s just in time, everything’s perfectly cost balanced, everything’s super efficient, they’ve got a resiliency issue. 

They’ve got to have the resource and the inventory and the organizational strength and the national strength on a country level to be able to survive things like pandemics, but also things like geopolitical tension. So where you used to have a just in time mentality, I think you now have to have a just in case mentality. 

And I think that goes for countries and that goes for companies and it goes for your raw material supply. You can’t build anything without, let’s say copper, anything electrical without copper. To a large extent. There’ll be lots of generalizations in this podcast. That was one of them. But to, but it’s a fair generalization that in general you can’t build anything without these things. 

So how can you therefore be your factory would close if your copper delivery doesn’t come in within a 24 hour period. It’s too critical. It’s too important. And we’ve seen in other critical metals what happens when they actually do run out and factories actually do close when they can’t get rare earths or the tungsten or whatever it might be. 

So, it is a new world, and that is affecting copper pricing, and you simply can’t run the same amount of low inventories that you used to. You could get away with low inventories very easily in the past because just about enough was always enough. But those low inventories are, you can’t do it. So, I think the whole world needs to carry more inventory, you know, have us announcing Project Vault. 

China’s done it for years, no one else has in terms of holding strategic inventory in copper. I think everyone else.  

AH: Yeah, it’s interesting because the whole point of the seven years of feast and famine was to build the grains to hold for when the famine was happening. So that sounds like that theory is finally catching up. 

DL: Yeah, I do think that’s interesting. Look, I think there’s a really big picture question here. You asked a little bit at the beginning, you implied just about the current fundamentals. I think there’s a big question. Does copper price current fundamentals, which it always used to, or does it actually price forward expectations? 

And I think we’re in a world which is moving towards more pricing of forward expectations. And yeah, things like storing up material for those difficult times geopolitically has to be a forward expectation. Now it’s been announced it will come. So just because there’s lots of copper now, which there probably is actually reasonably comfortable suppliers of copper. Just because there’s comfortable suppliers of copper now doesn’t mean there’ll be comfortable supplies in the future if every government in the world wants a bit of it.  

AH: So if the market is moving on that fear more than fundamentals, what do you think would have to change for the market to realize that actually the fundamentals haven’t really moved dramatically and they can calm things down a little bit?  

DL: Yeah, I hear you. So I would say prices are generally set by investment flows, and they’re the ones who are pricing in those fears. It’s investors who are pricing in those fears. It’s a pension fund deciding it needs some raw material exposure because for many, in various reasons, and not least the fact that their pensioners will in the future have to consume commodities, but also because it diversifies some of their other risks. 

It protects them various ways. So, what would change would be if the investors decide they don’t need that after all, and that is always a difficult question to answer. You know, how much is enough is always a difficult question for these sort of things. I’ll be dramatic and then I’ll be perhaps a little bit more moderate if you say that historically, portfolio allocations of the world were roughly 60/40. 

In terms of 60% equity is 40% bonds that gave you your protected balanced portfolio. Actually, bonds haven’t been working in that portfolio as much of protection now for years. Actually something like gold and silver has been. And so, what if the world decides it wants to hedge its portfolios with gold and silver instead of with bonds, even a percentage of that, even a tiny percentage of that would be very dramatic. 

And if we’re in a world where gold and silver are going to the moon, well then what about other metals? And I think that some of that dynamic has been what’s driving prices. And whilst that dynamic continues, prices will continue to perhaps be in a new paradigm. In the end, fundamentals win because copper prices set to a large extent by how much can be got out of the ground at what price, broadly.  

But at the moment, because A, There’s not a huge amount of excess being got out the ground, even though there is a bit of excess at the moment. There’s not a huge amount of excess being got out the ground. And B, in the future basis, most sensible predictions, there’s gonna be significant shortage copper out the ground. And C, it takes a long time. It takes years and years and years to build. I mean, the people give analysis. It says it takes 25 to 30 years to develop a copper mine now, okay, we can do something within shorter timeframes than that. You can expand existing production, things like that. 

And there’s mines that are in the process of that 25 year process. But it still takes a long time. You don’t just go to the shop and order more copper. It has to be mined and that takes years and lots of earth moving and billions of dollars of investment. And so yeah, it can take a long time to rebalance the market as well. 

AH: And it’s interesting, as you were speaking, I was thinking it’s almost as a fear has actually become a fundamental in itself. It’s sort of become this self-fulfilling prophecy in that everyone’s scared so they start stockpiling. You know? All of this is built into a position where it has created that fundamental almost. It stopped being noise.  

DL: No, I hear you. I think if you look at gold, part of the argument for saying that gold is useful in portfolios is because it’s been going up and it’s been going up because it’s useful in portfolios. It only looks useful in portfolios ’cause it’s been going up and so, so it, you know, it, it all does get quite circular and maybe that’s a useful thing to turn to. 

Right. Here’s my, here’s, this is a, uh, anecdote given to me, my friend and I said I’d put it into the podcast. Um, ’cause I thought it was actually very good. He was at a crypto conference. They do still hold them and they were all talking about golds, silver and copper. And he, because he knew something about copper said: What do you know about copper? One of the, obviously very smart crypto guys said, what do you know about money? And I think that is a really good summary of what’s going on in the end. The copper price is a formula. It’s dollars per ton, so there’s a ton of copper that comes into it. That’s the fundamental, but it’s also a dollar. 

And if you no longer trust the denominator of the dollar, then the numerator of the copper goes up in value, and I do think that’s a meaningful part of what’s going on here. Copper prices at all time lows in gold. So in gold terms, copper prices at all time lows, the denominator really matters. So I think we do have to think about the nature of money. 

Do you want a piece of copper or do you want an IOU from Rachel Reeves? Which would you prefer? Because that’s what money is. It’s an IOU from the Fed. It’s an IU from Bank of England or from the ECB. And in this current world, when the governments are the most indebted people on the planet and have no perceivable desire to want to ever pay those back then, which do you want? Take the IU or take a bit of gold.  

AH: Do you think that starts to make copper more like a store of value? Like gold feel closer to gold than being an industrial metal, in a way? 

DL: I think it’s a hybrid. So I think it’s a hybrid. Look, copper has been used in metal forever, so it does have a store of value, but also it’s very industrial. 

It’s primarily industrial. So I think it is a bit of a hybrid. Not many people are storing copper in their back garden as their savings, even me. So, um, so look, I think it is a bit of a hybrid, but it does have that element of a real tangible asset that is nobody’s debt. It’s an asset that’s nobody’s debt. 

It doesn’t depend on the system of money in the same way. And as such, it is a hybrid. So yeah, it does get some bid there, but in the end, I do think it is probably still worth me repeating. Fundamentals still matter, but in the short term, actually, the currency is also a fundamental ’cause that is part of the price. 

AH: So David, when you talk about it and you look at it like that, you mentioned a minute ago that you’ve seen a flow of money into copper from Bitcoin, how much of that do you think has come into copper? Because we keep hearing that.  

DL: Yes. I’ll slightly change it. So I think there’s been some really big speculative flows in copper. I actually think, and this is also probably under commented on, I think quite a few of those speculative flows have been coming from China. We have seen quite significant investment flows, really quite significant investment flows and price dynamics in China. If you’ve looked over the last three months, as markets have gone higher, a lot of that’s been led by the Asian time zone and a lot of that. 

It’s not so much industry, it’s, it’s the speculator. Now why are they doing that? I think, what else would you invest in if you are Chinese is one question. So property has been a bit of a disaster and as we all know in the last five years, so properties not great. Everything else. Again, is it subject to government confiscation? 

Government policy, whereas copper feels safe to them. It’s a market that China’s very important in, so they feel that they understand the dynamics of China world. I think it makes sense for there to be Asian flows. Now, Asian flows like that can flow both ways, so just because they’ve been the big buyer, they could be the big seller for the rest of the year. 

I don’t think actually Western speculative flows have been a huge factor. They’ve been normal, let’s put it that way. So there have been speculative flows for sure, but they’re not outsized to the speculative flows we had, let’s say in 2019, 2020, 2021. They’re similar. It’s not like there’s been something disproportionate from then, but the Asian flows have been disproportionate from them. 

They’ve been substantially bigger, which maybe makes sense. 2021. China was in a very severe lockdown. They’re feeling better about the world at the moment. You know, China makes the best products in the world at the best prices. What’s not to like?  

AH: Okay. Well, you talked there about copper feeling closer maybe to gold with that value. 

What risk do you think that disconnect between the price and the actual usage is gonna create? Because copper has always reflected the health of the global economy.  

DL: I suppose what I am saying is some of the old assumptions can’t be held to be true as to the risks. The risk of too high prices is always substitution. It always has been, and at some price you will get substitution. The two things that I would say protects copper. One of them is that actually this has been going on for quite a long time. Most substitution of copper is just the background is likely to be into aluminium. That’s the prime substitute for copper. 

Copper has been able to be substituted into aluminium for a long time, and a lot of it has been a lot of the easy stuff to substitute. Anything that was easy has been done because look, the copper price reached $9,000 cash price in 2006. We’ve had 20 years of, let’s say, high-ish copper prices that aren’t too different from where we are now. 

You know, we’re 12 and a half thousand now, but we were 9,000 last year, so it hadn’t moved for 20 odd years in many ways. So a lot of that substitution is mature, has happened. It’s not that there’s suddenly a huge wave of substitution coming. However, if copper went absolutely crazy, then people would do, if copper goes to 30,000, there will be worth telling all of your engineers in every factory work out a way for me to use less copper ’cause of the price. 

But the other thing I would say that is defensive for copper. A: look, it’s just the best, it’s the best conductor. 80% of copper use is electrical conductivity, and it’s the best. So that helps. You know, physics is copper’s, USP. B: Copper goes into everything electrical, but it’s a small component of the price of almost everything that it goes into. 

So although the copper price going up by 40%, let’s say from the lows last year. That doesn’t affect the price of almost anything. It goes this camera, my headset. It doesn’t affect the price. It’s immaterial. Other copper goes into the industrial grid. Well, okay, it affects the price of big cables, but the governments are gonna do it anyway. 

It’s not a price driven decision. Copper goes into housing and construction. Well, fine. Again, you don’t check the copper price when you’re buying your house, so it’s relatively price insensitive, relatively. So I don’t think it causes too much harm, but at the margin it does cause harm. At the margin it will cause substitution. 

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AH: I do wanna go back to the fundamental side of things because you know, you’ve said some of these things have changed. The old playbook’s thrown out and that playbook used to be actually read quite simple. China was the marginal buyer. That was where the demand came from. And when prices rose and China stopped buying copper, couldn’t find a home, and the price went down. 

This time around, we’ve seen China step back a little bit. I know they’re still obviously there and you’ve talked about the speculative side, but the copper is all going to the US now, and it’s just sitting there. Tell me, are we getting something wrong about this new dynamic or is this the new norm?  

DL: So I, I do think this has been an extraordinary period of time in terms of you’ve had this very clever thing, really, and whether it was on purpose or by accident, the US has managed to build a strategic stockpile spending no money, which is like pretty clever trick. 

So what I mean by that is by announcing the potential of tariffs and by the Secretary of Commerce recommending 15% tariff in 2027 and 30% in 2028, people have to price in that expectation that let’s say you give it a 30% chance, that’s still gotta be a 5% premium for 2027. If it’s only a 30% chance that it’s true, well that 5% then starts to be the best premium in the world for 2027, and then, okay, it’s got to go a little bit into the present perhaps because maybe you, you could position your copper now in America and then pick up 5% at the end of the year if that happens, and it could be a 15% increase. Wow. So America has been sucking all this metal in on the risk of tariffs, which would give a one-off appreciation of any stock that sits in America to the holder and that has been very powerful in the market because it has meant that there is always a bid for any spare ton of copper. Someone in America will want to buy it, to hold it, to get that pickup from the tariff when, stroke if, it comes, it’s a pretty asymmetric bet. If you can buy it for flat at the same price and you’ve got a chance of a 15 to 30% increase, great. 

You know, why wouldn’t you? It’s a good trade. So America has been buying all of the metal in the world. America hasn’t been buying it, but people have been shipping it to America for the chance of that uplift. Actually, right here, right now, in the last few weeks, the premium to America, it’s certainly in the nearby. 

So for delivery in the next three months, let’s say, has disappeared. And that’s because A is quite a lot of metal in America already. And B, Trump seems to be rolling back a bit on some of his tariff rhetoric. They were talking about rolling back steel and aluminium tariffs to some extent. Is that a world in which they’re gonna put a 15% tariff from copper? 

Maybe the expectation starts to change. So that is potentially quite a big difference because it means there’s no longer that bid for any spare time.  

AH: Well, that was what I was gonna ask. This ambiguity is all very well, but it doesn’t last forever. I mean, at some point the music stops and there is a decision made. 

So walk me through those parts. Either tariffs are imposed or delayed or they say, no, we’re not going to have them. I mean, how do prices, the flows, behaviors change in each of those scenarios?  

DL: If you say there’s three scenarios, if tariffs happen, that’s one. But if tariffs happen, the US goes to an immediate premium, but there’s no incentive to ship to the US anymore ’cause the moment you ship to the US you have to pay the tariff. So what there is is a massive incentive for the guys who stock holding in America to say, oh great, this is, I can now get out so I can give you my stock and take a huge profit. Everybody gets a bonus. Happy days. So one, that disrupts the flows to America. 

They stop for a while and America just consumes its inventory that doesn’t import anymore. Again, I’m generalizing, I’m exaggerating, but to a large extent, there’s no incentive to import for a while until you’ve consumed all that stock. The other end is they say there’s never gonna be a tariff ever again. 

Well, in that position where there’s no tariff at all, then again there’s no incentive to ship, and this stockpile has got no future uplifting value. So you just wanna sell it as quickly as you can. To whoever you can just to get out of it. So in those two situations, actually the no tariff and the definitely tariff, they’re remarkably similar in terms of the behaviour of the people with the stockpiles, they want to sell them. 

They’re different in terms of global flows. Only insofar as if there’s no tariff, you might see exports. Whereas if there’s tariff, that’ll be locked into America. But other than that. America ceasing to buy for a bit is the logical progression. There is a third option, which is continued uncertainty. If I was managing the White House, I would try to play the continued uncertainty for longer. 

Why not? It’s doing you no harm. It doesn’t really hurt your consumers, and it does build an inventory fund. So that’s the third option is more of the same. There’s gonna be announcements fairly shortly in three months’ time, maybe for four months time.  

AH: Is that where your money is? Is that where you think it’s happening? 

DL: Well, I don’t see why not. Just why not? Yeah, it’s not doing any harm just. Keep it going somehow, probably, I would say, look, we’ve looked at these future tariffs. We think there’s a good argument for future terrorists, but we’re gonna delay it till 2028 or maybe put some certainty around Anyway. Look, I’m only speculating, not worth, not worth listening to me on that. 

The only other thing though that I would note, which I think is worth thinking about, is that if either there’s no tariff or there’s tariff and there’s this big inventory that wants to get out. That might be quite a good opportunity for the US and for Project Vault to just take it because it would be there. 

So again, I wouldn’t put zero chance on that. And if that happens, I think. The copper market that was waiting for all the metal to be released back might get a nasty surprise. So, uh, anyway, look, I, I’m just to be very clear, I’m a hundred percent speculating. I am Dave from London who is just speculating on what the US government may or may not do. I have no idea. 

AH: It’s amazing though. I wonder whether you’ve ever seen a trade in all of your time of trading where doing nothing was this effective, just sort of creating this uncertainty. I know astonishing really.  

DL: There’s either some genius in the US State Department who thought this through, or, or whichever department it is, or, or else they’ve been lucky. 

But whatever it is, it’s worked and I, and it is a model that everyone’s thinking about. We do know that the US is very aware of what’s happening. They know what’s going on. They know the effect. They do understand what’s going on. What I’m less clear about is whether it was intentional or not, but they definitely understand it. 

Well, I mean, actually look, I’m gonna be really positive about the us. The US is actually, I was gonna say the first government to take raw material supply seriously. It’s the second government, ’cause China’s been doing it for a while, but it’s the first Western government to take raw material supply seriously. 

And for that we should all be thankful because generally our governments in the west have been incredibly shortsighted. So I think it’s, you know, credit to them for thinking about it.  

AH: Whether accidental or not, they definitely created the most cost efficient strategic reserve in history, effectively, without actually having to spend anything yet. 

DL: A hundred percent. Yeah. It’s magic.  

AH: It is magic. You mentioned the states that David, I’d like to talk a little bit about what you are doing as well these days. Drakewood. Talk to me about Drakewood Capital Management. That’s been a few years now.  

DL: So I don’t know anything else apart from metals. So we’re entirely metals focused. 

If people think metals, we want ’em to think about us, and we are not arrogant enough to think we know anything about other markets. It’s tough to be an expo in one market, let alone many. So, we focus on metals. We’ve got two active funds, which is a futures and option funds called the Draco Prospect Fund, which trades on the London of metal exchange, the commodity exchange in New York, the SGX in Singapore, and the trades, major metals, and that’s the biggest part of our biggest fund we run. 

We run a metals and mining equities fund out of London, trading listed equities. And these funds are to capture the opportunities that we think are information base generates in the market. We also have quite a long record now and varied record now in what we would say co-invest strategies. What we mean by that is that if we see something interesting in the market, and I’ll be specific in a minute, but if we see something interesting in the market, an investment in metals, that makes really good sense. I’m always trying to think where in the metals value chain is the best value at the moment. Where’s the best bit? Is it with the miner? Is it with an exploration company? Is it with a manufacturer at the end of the line or a trader in the middle?  

You know, where is the value and we’ve done a number of co-invest where essentially we will invest a bit and then an investor will invest a larger chunk alongside us. So we always put our own resources on the line, but we have other partners, financial companies, pension funds, other funds, client worth, individuals who invest with us. 

And to give a few examples of that, one that has closed and finished, well, it hasn’t closed, but we’re sold and finished. We have, uh, big tube business in North America. We had six factories making copper and aluminium tubes. Four in the US, one Mexico, one Canada. That was disposed of in 2024 as a few legacy assets that we’re still working on, but pretty much all gone that had backing of a pension fund, a PE company, and high net worths. 

Good multiple on invested capital. We also have made a number of loans to mining companies. So in my previous life at Red Kite, we had a big mine finance fund. We’ve been doing mine finance businesses, but as a purely as one-offs where we will invest a bit alongside some other people. We’ve done that in the UK and North America, and then we’ve also looked at a few equity things. 

Principally in mining equities. Again, some few, mostly early stage mining companies that we think have got really good value, and again, alongside others, but also perhaps the most, I shouldn’t say the most interesting project, it’s maybe the hardest project, but it, it is probably the most interesting is an electronic waste recycling project in North America called Exurban. 

Again, there’s some very significant investors alongside us there. In fact, those investors are sufficiently large and influential that they do a lot of the heavy lifting now, but we’re alongside them and we started the project and we’re alongside them in Exurban, which is taking electronic waste and recovering all the critical elements from it. 

The administration and others are very focused on the critical elements. There’s 27 different elements in a printed circuit board. A good number of those are critical, most of them. And if you can recover those, rather than either tossing them to landfill or exporting them overseas, you can recover them in the US you increase the US’ strategic strength in terms of critical minerals. In fact, I joke it’s the perfect investment in a divided us. It’s one of the very few investments that everybody likes because the Republicans like it for the critical mineral side and the Democrats like it for the circular economy side. Everybody’s happy.  

AH: Yeah, exactly. Exactly. And it’s not just copper as well, isn’t it? It’s tungsten. Talk to me a little bit about that, because you got involved there.  

DL: Yes, very topical. ’cause it’s just been funded to get into production, but we backed a UK Tungsten project. Cognizant of my inherent bias. I think tungsten is one of the most critical metals. 

Every time you cut metal, every time you drill stone, you will use a tungsten carbide coated tool of some kind, and roughly 10% and maybe more now goes into military uses. It’s the hardest metal so. For a lot of the modern weaponry, tungsten’s critical. It’s also roughly 85% produced in China, and if you add in Russia and Vietnam, you get into the nineties. 

So the West is very dependent. China has exports controls in place. The US military has said it’s not gonna buy from China at all in the future. As such, it’s a very critical metal. And so. We got involved. The UK actually has a really good tungsten resource, very large. It mined up until 2018 when it closed due to low prices at these prices. 

It’s a fabulous opportunity in my opinion. I have to give all sorts of disclaimers. Prices can go up as well as down as well as up. But yes, I think it’s a very interesting resource. I think it’s fabulous to be bringing back metal mining to the UK and this is a good vehicle to do it. It’ll also process some tin and hopefully help enliven the whole region. 

There’s a number of other good projects down there that we’re not involved with, but there’s a number of other good projects down there on the tin side. The UK could have quite an active mining region and these current prices and costs. There’s been some technological improvements that also make it more commercial, but that’s very exciting. 

I’ve enjoyed being involved though.  

AH: Keeping yourself busy. David, I do want to ask you a few questions, little ones about your history because can’t let you get away without talking a little bit about that. Now, copper as a market is well known and very famous for humbling, some incredibly smart people along the way. 

So I’d, I’d love to know from your perspective, what is the hardest lesson that copper has taught you personally?  

DL: Look, I think generally. Mark to market accounting is incredibly good for your humility because there’s a lot of jobs you can work at and you can think you’re brilliant, but the only reason you think you’re brilliant is that essentially it never gets measured. 

Whereas if you’re copper trading, you get measured every day, and we’ve had some shocking losses over time, and you can’t make an excuse, you lost money because you made a mistake, and there it is in black and white, the actual number in front of you. So, no, I mean, it definitely humbles reputations hugely. 

And actually my former boss used to say something like, pride is the most expensive commodity. I think if you go in with pride, you will end up paying a really high price for it. You have to always be in a search for truth that has nothing to do with your own personal ego. And you have to be willing to say, I am wrong, and I’m gonna be honest and say that is sometimes quite hard on a personal basis, but you gotta. 

So I dunno if that’s a good enough answer.  

AH: No, it is. It is. Very wise words as well. Yeah, for sure. In terms of the markets as well, have there ever been times when you’ve sat back and thought, oh my goodness, I didn’t put that trade on. What’s the best copper trade you never made or that you didn’t put on that you wish you had? 

DL: I was disappointed last year to not be in the physical business. Most of my career, I’ve been in physical business last year, that physical trade, the arbitrage trade was like the most amazing physical trade opportunity there’s ever been. And I wasn’t in a place where I could do the physical trade. So that was, that was mildly irritating. 

But hey, there you go. Look, that’s just the way. That’s the way it is. We’d also did some other fabulous things last year, so I’m not gonna think about it too much. But yeah, that was definitely a miss.  

AH: That kind of takes me back 20 or so years to your Red Kite era. And I wondered, when you talk about being involved in the physical trade, what the biggest myth about that era was for you and specific to Red Kit? Because there were quite a lot going around at that point. I reckon there was lot.  

DL: There was a lot. I used to think, in fact, the only real advantage we had was knowing that most of the stuff that we were being told we were doing wasn’t true. So people were saying essentially we were hiding metal, you know, we were making it artificially tight and it was all Red Kite. 

It was all a put up job. It was all just a stitch up. There was a number of people that would’ve sworn up and down, and that was the case. So the one thing we did know was that wasn’t true, but because it got boring saying that’s not true. My view at time was, no. Let’s start talking about this a bit differently. 

I’d go say, yes, yes. We are hiding metal. We’re hiding hundreds of thousands of tons. I’ll tell you a secret. The way we hide it is we buy it. We then put it in a ship and we ship it to China, and then when it gets to China, we give it to people and they hide it in their factories and then they hide it even better. 

They hide it in their products and then once they finished hiding it in their products, they hide it in like in buildings and in and in infrastructure and things like that. People will never find this copper. It’s so well hidden and it because it’s just, it was complete nonsense. I mean, it was always complete nonsense. 

I mean, that’s not, say we didn’t have inventory. Everybody has inventory, but in terms of actually some dastardly plot. It was all nonsense. What it was was an incredible boom where China was consuming vast amounts of copper to putting it into buildings and infrastructure and products, and that was definitely hiding the copper. 

Hiding copper in furnaces is always the best place to hide it.  

AH: I couldn’t agree with you. Well, I do remember that era really well, David, I wanted to finish by looking a little bit further forward, so I know you don’t follow the pack, so go on then. What’s your most contrarian view on copper today? 

Something the market might think is a little bit crazy, but that actually could realistically play out over the next few years.  

DL: Well, well look, but this is not gonna be quite contrarian ’cause I think there’s quite a few people saying this sort of thing but combination of AI and robotics is really interesting. 

So firstly, just simply to build the AI is a lot of copper, the data centers and more importantly the copper to empower the grid, to enable the grid to power the AI cent. So there’s that. Now people are talking about that, so I’m not gonna talk about that. What I am gonna talk about though is every product is basically human ingenuity, plus raw materials gives you a product. 

Now they’re throwing a bit of labour in there as well. So actually, let’s put it, ingenuity plus labour plus raw materials equals a product. And in raw materials, I’m including energy. What the AI revolution is doing is removing and adding vast capacity into those constraints. So human ingenuity, intelligence, we are now making intelligence. 

Let’s say it would take 16 to 18 years to make a human intelligence such that a human is intelligent enough to be productively contributing to the economy of the world. Well. Guess what? The AI is making the AI to make the intelligence. It’s on an exponential growth of intelligence. So your ingenuity is no longer a limiting factor. 

Your labour, if that’s a robot. Being assembled by AI, powered by AI. I mean, again, all that you need to make any product suddenly starts to be the raw material. That’s it. Nothing else. You don’t need the people. You don’t need the ingenuity. It’s only a raw material constraint. You can make every product at a very low, marginal cost that is purely energy, raw materials, and the rest gets done for you. 

If that’s true in this emerging world, all that matters. All that matters is the raw material and the energy being as part of that raw material mix that is. An interesting world to think about because historically all that’s mattered is the manufacturing capability. That’s why Britain got an empire. 

That’s why China’s exploded in the last few years. That’s why America dominated the world. Suddenly that manufacturing ability is just the matter of pressing go on an AI robot or whatever. The only thing that matters is raw materials. So I think that is worth thinking about. Look, it’s not something to trade tomorrow. 

Technology’s far enough away, but what is the constraint in a new AI and robotics empowered world? I think it’s only raw materials, and as such, for most of my career, commodities, a bit of an afterthought. Oh yeah. And we need to buy some copper as well. Fine. Suddenly they become the first thought that your production capability is unlimited except by the raw material you can get. 

AH: Yeah, and I think add to that more material list. Power cheat. Always on power. Yeah, power and hundred percent. And water as well, because they need water power. Those are limitations at the moment.  

DL: A hundred percent. And both of those, I’m counting as raw material. And the power side is obviously particularly interesting for copper because not only is copper with raw material going into the product, but it’s also the key enabler of the power as well. That’s why saying to, I think it is gonna be a very interesting next few years. I don’t think we are done insofar as like this is the end of excitement in the copper market. I don’t think we’re entering seven years of famine because I think that’s gonna be quite transformatory as it happens and things happen fast in AI. 

So seven years. That’s a very long time in AI. Seven weeks is a long time in ai, so um, yeah, fun times.  

AH: It is fun times.  

DL: I do think it’ll be fun times, as I say, just at the moment, and I think the only health warning at the moment is right here, right now. There’s enough copper around, but if you believe that future story, maybe it’s your last chance to buy. 

AH: Perfect. I think that’s a really, really great place to leave things. David, that was a masterclass in how copper really works beneath the headlines. Thank you so much for joining the show.  

DL: It’s really good. I’m afraid I, if I have a weakness, it is wanting to talk too much about copper. 

AH: You’re always welcome to do it here. Brilliant, brilliant. Thank you.  

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AH: Well, that was fascinating as expected to chat through some of David’s ideas. I’m going to bring in Will Adams, my friend and colleague at Fastmarkets. Hi Will. How are you doing?  

Will Adams [WA]: Yeah. Good. Thank you Andrea. Very good. And yourself?  

AH: Yeah, not too bad. I know you were listening with me to David Lilley there, and I know that you have an equally long history in the copperer industry and have a great knowledge of the sector. 

So with your research hat on Will, I thought we could talk about some of the things that David said.  

WA: It is very interesting. He obviously knows the market inside out and been involved with it a long, long time and I think it’s a really interesting time for Copper. You know, we’ve moved into record high prices recently. 

It just seems like we’ve moved into a different part of copper’s future, I suppose, and there are various things which he’s mentioned, which are behind that. So yeah, I think it’s gonna be an interesting time ahead.  

AH: Yeah. As you just said, and he was laying out that new era for copper. He kind of set out a various number of reasons why that was the case at the moment. Was there one that stood out the most to you?  

WA: Yeah, I think where he said copper’s moved from a just in time market to a just in case market. I thought that was, you know, very meaningful. If you go back two or three or four years, governments tended to let markets sort themselves out. You know, laws of supply and demand. 

We had sort of the disruptions from COVID, we’ve had the Russian invasion of Ukraine, we’ve had the US sanctions. So all these things have really disrupted the supply chain, and I think governments now realize, and then this is running in parallel, should I say, with new sort of areas of demand for copper, from electrification, from AI, from the increase in defense spending as well and building out the power grids, I think governments suddenly realize that actually these are metals we cannot do without. 

So we have to build our own supply chains, or we have to secure that supply, and that’s meant that they have added copper amongst many other metals and minerals to their critical minerals list, and you know, they’re much more focused on it. They’re much more concerned about it. And it’s dawned on them that it does take a long time to build up a lot of these supply chains. 

And as a result of that, they are working hard to sort of build up these supply chains and try to get on top of it.  

AH: Yeah, absolutely. That resilience aspect is really important. Right now, his most forward looking idea was that AI and robotics are gonna shift the constraint from labour and ingenuity to raw materials. 

It made me think if raw materials do become the real bottleneck, does that guarantee even higher prices, or do you think it just guarantees higher volatility for the copper market and other commodities that are going to benefit?  

WA: It’s really interesting. If you look at a long-term price chart of copper, if you go before 2002, we were at a fairly range bound market, and then when you had the super cycle coming on in 2003, copper just moved into a totally new playing field, much higher and was much more volatile all the way through the end of the super cycle. 

And then we had the great financial crisis, and then you’ve had the COVID sell off, and then you’ve had the COVID rebound. Just recently, we’ve totally broken up, smashed up through that again, as we did in 2002 at the Supercycle. So I think we are moving into a new sort of playing field now, and therefore we will need higher copper prices to make sure that new supply is brought online. 

If you look at the electrification, if you look at AI, it does mean we’re gonna need more copper per person. And therefore we need to incentivize that new investment in that production. And again, I think it’s really important for people to realize just how long it takes to build a new Greenfield copper mine. 

AH: Oh, absolutely. I mean, in the US, look how long it’s taking over here at these days. Even with all of the additional impetus that we’re seeing, which is why I think as well, we’ve touched on this too. The striking idea of the US building an unofficial stockpile without actually having to spend a dollar purely through that policy ambiguity related to tariffs. 

Do you think that’s a master stroke of policy or, I can’t work out if it’s an unintended distortion that’s gonna painfully unwind and how fragile it actually is because that ambiguity is not sustainable forever. Because at some point I would imagine the market’s gonna force a decision of some kind.  

WA: By threatening to have tariffs on copper and having seen what’s happened in aluminium, you know, the market quite rightly said, okay, well let’s position ourselves to take advantage of that. 

There’s been a massive restock, and as a result of that, there’s been a big distortion in markets. It’s impacted regional premiums as well, whereas the market overall was probably gonna be in a slight surplus last year. We did end up having quite a few supply disruptions as well, and now it’s more of a balanced market, small deficit. 

But what’s happened is that movement of metal to the US has made the market feel much tighter. And hence, even though we’ve had a roughly balanced market, we still managed to see sort of record high prices because I think of distortion by the metal moving to the US and now at one stage the US Camex premium over LME was significant, so that’s attracting the metal into the US. 

That premiums now unwound. There’s been no direct comment on what’s gonna happen to section 232 copper tariffs. But I think the market feels that they’re either not going to be introduced or any decision will be delayed. Hence, the Comex premium has disappeared. But now you’ve gotta question what happens to that copper? 

Does it start to flow out of the US again, you know, you’ve got premiums in Europe are much higher than they are in the US and much higher than they are in in China as well. So yes, that is gonna be key now whether that copper tied up in the us, whether it now flows back into the rest of the world and that, uh, creates more availability, which you would expect then would sort of weigh on prices. 

AH: It’s interesting because obviously in the background of all of this, now you’ve got Project Vault, which has come along. You know the idea of creating a stockpile, creating that strategic reserve for the US. Do we see them just decide, the US government decide that it’s going to swoop off all the copper that it can and stick it into storage for its stockpile and, and there you go. 

One and done. It doesn’t need to worry about it. I mean, that’s a, a real possibility.  

WA: Yeah, that could be an interesting play. ’cause that would then take up all that surplus copper that has built up there and in effect take it off market so the market would be that much tighter again, if they were gonna stockpile and have to pay the premiums that we were seeing. 

Obviously that would cost them a lot more money now that the premium’s gone away, you know, but just ’cause there is the metal there, it doesn’t necessarily mean it’s for sale to the government, but that’s another, that’s another story.  

AH: David also downplayed substitution risks. He argued that most of the easy substitution has already happened. Do you think that substitution risk is overstated? We do hear about it quite a lot. Or do you think it just lags prices?  

WA: That’s, you know how I see it as well. There has been substitution over the years, you’ve had a huge price differential anyway to encourage that substitution. And talking to some of our customers, they say there’s a quality risk that if they go and switch to something and then you know that, that it doesn’t work quite so well then that could affect their brand and things like that. 

So it’s not as easy as said, and it does take time. And I’d say I think a lot of it’s already happened. So, and as David said, at the end of the day, even though copper price is expensive, the amount of copper in the end article is probably relatively small for a lot of things, and therefore it’s probably priced. 

AH: This is why people love copper. Will thank you so much for chatting today. Again, another really interesting conversation and a hot topic as well.  

WA: Yeah, very interesting. Andrea, thank you. Thank you once again for having me on.  

AH: So everyone please stay tuned for our new market briefing, which is gonna be focused on the wider commodities landscape. 

So that includes metals and forest products and agriculture and carbon. So, keep an eye out for that in your Fast Forward feed. And to do that, subscribe on the Fastmarkets website or anywhere you get your podcast.