Transcription
I want to start with copper and the signal that this is sending to you. $14,000 a ton. I think what we're seeing in copper is a market driven a bit more by speculators than fundamentals. So when I see these headlines saying Chinese demand is driving things, I think, well, that's suddenly, suddenly in the last couple of days, Chinese demand is just spiked for for copper. No, I don't I don't think that's the whole story. I think there's a speculation. There's, you know, people are looking for asset classes. They're looking for something to own in an environment of uncertainty. Right.
So you got an eye and maybe this is a derivative of I there's also uh cost factors because copper goes into it goes into data centers. It's not a big, big driver. Yeah it's a small piece of it. But it gets a lot of attention as you can imagine. And then, you know, the concerns about availability of sulphuric acid and about fuel in Peru, for example, is second largest producers, second or third largest producer globally of copper. So I'm not sure that this is totally, fundamentally driven. I would be pretty, uh, high conviction that we're not going to be much higher than this in a year from now when the copper supply comes back on, and several high profile mines that are off line right now.
What do you guys suppose will be the global economy in a year from now? Do you feel like you are comfortable to make a projection in terms of where things land? No, I was really trying to talk about the supply side I that all together. But I think the the piece of the puzzle that's easier for us to forecast is the fact that the grass work mindset for Freeport is not fully operating, but it should be a year from now. Right. And the Panamanian situation could be resolved and could be ramping back up. So that right, there is a couple percentage right there of the global markets that could be back on line.
But as far as the demand side, yeah, I mean I think you're going to have a mixed bag. I think that, you know, if if we have a prolonged war in the Middle East, you're going to have concerns over, uh, you know, recession or depressed demand. And many of the countries that are big consumers of copper. Right. So Europe, in the Middle East, um, sorry, not the Middle East, Europe and Asia. And I think that, um, offsetting that, of course, is some demand strength, but I don't think it's quite as powerful as the market is signaling. I think there's more to the story.
Okay, well, that's one story. There's also the aluminum story. Yeah. Right now. And you had a note out earlier this month. You, uh, upgraded Alcoa to overweight your price target $70. It's at 6760 right now. So, yeah, they're getting there quick. You said limited global capacity additions, low global inventories, also disruptions with the Iran war. What's the Alcoa story and what's the aluminum story?
I mean, Alcoa up 27% year to date. Like it's just fascinating to me some of these raw materials and how interesting, um, or how interested investors have been in this space. But if you were to look at Alcoa versus the aluminum price, it's actually decoupled and underperformed the aluminum price. So that's, you know, you could look at how much I moved year to date. And some investors are saying, you know, earnings have been disappointing. But the fact is you're looking backward to say that you're looking at first quarter results before the big squeeze in aluminum. And there's always a lag effect. But the amount of cash generation at these aluminum prices. It's it's really going to materialize in the second quarter and beyond. And I know we hit a really exciting number in copper. But the Midwest premium today also hit an all time high. So um, you know aluminum actually is probably really undervalued at these at these prices. And we've seen forecasts that say that it should be at least $4,000 a ton from the recent, what, 3600. Yeah. In fact, the Midwest premium at an all time high is still too low to attract the necessary amount of material to this country relative to seeing it go to, say, Europe. So I think aluminum is is pretty sticky. Feel a lot of conviction that the market is yet to fully experience the shortfall in aluminum. There were several smelters that took direct hit submissions. Right. They're not coming back anytime soon. It's going to be six months at earliest, with some that we're not hit by missiles. Those hit by missiles have to get rebuilt. That will take 12 to 18 months, if you like.
You joined us at Bloomberg Invest. Uh, early mid-March, let's say mid-March. Yeah. Was that mid-March? Yeah. Yeah yeah, yeah. And the story was was similar, but I think back then a lot of us thought this this would be over by May and it's not right. Does that how does that change your view on the outlook for these raw materials?
You know it's companies. It's hard to get information out of the Middle East. And exactly what the status of some of these smelters are. But what we are hearing is that, again, they're hit harder than I think the market is demonstrating. You know, if you look at that aluminum price and you look at the shortfall of aluminum before, uh, before the Iran war began, we thought that there'd be a shortfall of about a million tons and change in a 74 million ton market. Now, that number could be at least double and could persist a lot longer than we thought. So there's going to have to be substitution away from aluminum because there will not be enough. And there's already concerns in the market about aluminum availability and switching to other materials. So I think the aluminum squeeze is just in its early days.
Um, how hard is it to get information about the Middle East? You mentioned that. And I'm curious like what you are hearing. Um, and do you guys have a team on the ground or what can you say? No, we do not. We rely on some of that specialist. Yeah, a dozen people that just look at aluminum. So we would look at that. But for all like in terms of the commodity areas that you play, like I'm just curious like how much, how difficult it is to get information. Well, because the Middle East is so much of the aluminum supply, it's 9%. Um, you know, there there's an Iranian smelter, for example, and no one knows exactly what the status of it is, but we believe it's probably not running full out. And, um, you know, there's pretty good information on EGA. Um, Qatar, uh, the cut loom one is, I think, a joint venture with a publicly held company so that we have okay information. But I think there's it's hard to get in and make a proper assessment about how long it could take to restart because it's still in a war zone. Yeah.
It does feel like, you know, people are underestimating how long we've talked about it a lot with LNG in terms of, um, Qatar in terms of its impact. So you just think we're not even done yet. And it's just interesting to have conversations where you're saying, like, if it goes on longer, like we are every week that goes by. It's going on. It's going on. But I think irrespective of if the war is over, it doesn't matter. The aluminum situation is is going to be tight for a while. Yeah.
There are bringing in. What we heard is they're bringing in bags of. So there's a couple reasons. There's the ones that were hit directly by the, the missiles and the others that can't get aluminum. And there's others that can't get LNG. Right. So it's a trifecta or more of problems that are affecting the smelters in the region. So some of them are bringing bagged aluminum. I mean, this used to come in ships. It's powder. Bring bagged alumina across the desert in order to kind of keep hobbling along at these and these smelters. So it's not ideal, but they're just trying to keep the semblance of operations that they can. Um, so I don't know if they'll be a whole lot more hit, but I think that the, um, perception of ability to restart at any, you know, quick pace is, is completely wrong.
I promised we'd go around the world and around the periodic table. Okay, awesome. So let's talk a little bit about steel, okay. And, uh, what you're seeing as far as, uh, US demand US supply. You argue. It's too soon to call the top. Yeah.
So we do a lot of channel checks and steel, and our latest are suggesting that demand is decent, especially if you're in data centers, border fence and, uh, utilities. Those are the big three we hear about. But also there's little pockets of demand on wind towers are really border fence. Border fence. Yeah. So made by, uh tubular. Tubular. Yeah. That's that's that's not totally on my radar. So being built in demand, that's what we hear. Yes. And so there's, so that's, that's a big sucking sound out of part of this southern, uh, southern steel mills that, that make those products and then, uh, wind farms and also, um, bridge work is really active. So there's little pockets, but broadly speaking, construction isn't great. Auto isn't great. Energy isn't exploding by any stretch. Wind farms in the U.S.. Yeah, land. Land based wind farms because they can start up really quickly. So if you need, uh, if you're waiting for a turbine, you're going to be waiting for years, um, in front of these generators. Right. But if you have wind farm, wind farms, I guess these some of these wind power. Um, yeah. These are gas crap. Yeah, yeah, yeah. Which that which. There is a big waiting list. Correct. But I guess the wind capacity can start up within nine months. So that's seeing a proliferation of demand. So there's there's little pockets of demand but overall not great.
The bigger dynamic here is that imports have fallen because of 50% tariffs. So the domestic mills are taking share from imports. Utilization hit a four year high almost four year high last week at 81.4% in the U.S.. And that was really Trump's design. From what I read, um, that, you know, he wanted to see U.S. utilization improve so that, you know, more steel is being made in the US. Um, so overall, um, demand is pretty okay. And, uh, mills are running pretty hard, and they're raising prices every week on the flat rather than plate side. Even rebar. Um, I think we got a little more ways to go before any risk. And even then, it's tough to justify importing steel when you've got high freight costs, interest costs to store it, etc..
Tipping, you know, just got about a minute left here. How much of any of these supply chains can really dramatically change any time in the near future. I just think about the war Covid, like it does feel like there's a global rethink about making sure that your national supply chains are secure. Any of this that we've talked about, be it copper or aluminum, steel, I mean, these are things that we don't see necessarily a lot in the U.S. anymore. How quickly can any of this change or will it change in your view?
Well, it's not practical for every country to build their own aluminum smelter. So in the past, we as a country thought it was okay to have a good portion of aluminum capacity supplied by Canada there across the border. Right? I guess we don't think that anymore. That's not sufficient, right? Um, so, you know, things could change in terms of our thinking about politics and borders. But other than that, yeah, it's not practical to have every country have a silo of its own operations. But we're going more in that direction for sure. Yeah, I always think about that, doesn't it isn't going to raise prices on everything. I would ultimately create a lot more supply, and prices would go down if borders wherever to reopen in a big way.