It’s a brave man who buys copper at current price levels. It was the wonder trade of 2005, tripling in price, then in 2008 it marched all the way back, falling 70%. Since then copper has tripled again - yet Neil Gregson, a co-manager at JP Morgan Natural Resources, says it has a lot further to go.
Copper makes up about 10% of JPM Natural Resources, and with the fund approaching £3 billion in size, that’s a lot of the metal to have in an investor’s portfolio.
Gregson is not following the herd. Talk in the copper market is about falling industrial demand as the American economy slips back, lower demand from the Japanese auto industry and builders substituting plastic for copper. Some see it plunging back towards 2008 levels again.
But Gregson is more interested in the medium and long term. On trend demand growth, by 2020 we will be consuming about 150% of the world’s supply. That’s not possible, so something has to give - either the price rises further to restrict demand or supply comes forth to meet that demand.
There lies the fundamental reason why Gregson is a fan of copper. A professional mining engineer, who spent many years in the South African industry, he understands how exploration, production and development works at the sharp end. What he sees in copper is a near-total lack of new discovery, and mines coming under intense pressure. Therefore, prices will rise. By the way, Chile seems to have much of the metal, so it is going to enjoy the ride. Gregson contrasts copper with coal, where there is “plenty around”, and iron ore, where there are a lot of undeveloped
prospects, inhibited partly by local infrastructure.
“Copper is very different,” he says. “It’s not an infrastructure issue. We just have not been discovering any for some time. In total at JPM we manage £10 billion in natural resources, and £1 billion is in pure copper production plays. “Yes, there’s substitution going on - Nissan, for example, has produced a car which uses aluminium wire rather than copper. In house building, developers are looking at using plastic substitutes for copper tubes. But this has been going on for some time now. If you look at Codelco in Chile, it is struggling to maintain production.”
The state-owned copper giant produces 11% of the world’s output, much of it from El Teniente in the Chilean Andes, the world’s largest underground mine. But production is slipping - from 437,000 tonnes five years ago to 404,000 tonnes last year - and ore quality is dropping.
But while Gregson, who co-manages the fund as one of a team of four led by Ian Henderson, is keen on copper, JPM is not betting the farm - or mine? - on it. JPM Natural Resour - ces is a highly diversified fund. There has been no move towards a concentrated, focused portfolio in the style of other equity managers. The fund holds 250 stocks, with a long tail of about 100 that in total make up just 10% of the portfolio.
Assets are broadly allocated across three “buckets”, with 30% going into precious metals (gold and silver), 30% into base and bulk metals (iron ore, coal, copper) and 30% into energy (oil and gas). The remaining 10% goes into the “other” category, comprising things such as rare earths.
The precious metals bucket went up to almost 40% as gold and silver prices galloped ahead. JPM has since let it gradually shift down, putting new inflows into the other buckets - not just copper, but also oil and gas.
Gregson does not try to predict short-term oil price movements. Brent crude has gone from $90 at the start of the year to a peak of about $125, but has slipped back to $115 on fears about the strength of western economies. “There’s been a fairly sizeable correction recently, but there’s a feeling that it’s near its end,” Gregson says, referring to the smaller oil exploration companies rather than directly to the oil price.
In any case, many of his holdings are the big integrated oil companies where a lot of returns are generated irrespective of whether the oil price sags. And medium-term demand is also supportive of a rising oil price, says Gregson.
“We don’t see the oil price coming down dramatically. So long as it remains above $80 it’s a good environment for the exploration companies.”
He has been keen on several Canadian-listed explorers drilling in Colombia, which have been volatile but make up that long tail of stocks that, if they gush, add materially to the fund’s return.
“Copper is not an infrastructure issue. We just have not been discovering any for some time”
It has to be said that compared with BlackRock’s Gold & General fund, this is a more growth-y, more cyclical and more volatile choice. Over the past year JPM Natural Resources is strongly ahead of BlackRock, gaining 25% against just 12% by its main rival. But over three years it
trails, growing by 17% to BlackRock’s 37%. Over five years they are closer, with JPM up 86% and BlackRock up 111%.
Neither will particularly appeal to ethical investors. Carving huge holes in the ground and carting stuff across the globe is an environmentalist’s nightmare - and that’s before we look at local labour practices and domestic corruption. Funds in this sphere are particularly exposed to environmental and political risk (no one predicted the Arab Spring) but Gregson says JPM takes its responsibilities seriously.
“We are always keen to ask about local workers, how much local ownership there is, and examine local health and education services. It’s an important part of what we do.”
Some investors may be more worried about the long-term story. Is the commodities cycle rather long in the tooth? Gregson says: “There’s talk of reversion to mean, but the fact is that we think commodity prices won’t do that. If we revert to prices that we saw in the early 1990s there simply won’t be any new production coming on stream. You have to look at the law of big numbers. Even if China’s growth halved to 4% a year, it would still continue to be a huge and growing consumer. Ten years ago it took 10% of the world’s base metals, today it takes 40%. That’s not about to go away.”
