Sidekick Money · Market Pulse: Disruption at the speed of light, copper fever and BNPL incumbents under pressure

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Welcome to this week’s Market Pulse, your 5 minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.

In this week's edition we have:

Disruption at the speed of light
Copper fever is spreading
BNPL incumbents under pressure

It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

1) Disruption at the speed of light

ChatGPT has only been around for about six months but the list of industries and existing business models being disrupted is growing fast. There has been a lot of speculation about how ChatGPT might impact different companies and industries and last week we got some hard data to give us a better idea.

Chegg, a company based in San Diego, provides subscription based homework-help services to students. Last week they warned that students are opting for free ChatGPT based solutions instead of its solutions and that it is having an impact on their customer growth. As a result the company withdrew their annual revenue forecast and in the aftermath the market value of the Chegg fell by half as many investors jumped ship[1].

Chegg is not the only company being impacted by ChatGPT. AI is increasingly colliding with other businesses too. IBM recently said that they will stop or slow hiring for jobs it believes will be replaced by AI. Samsung last week banned employees from using certain AI tools. It is worried sensitive company data might be sent to external servers. JPMorgan, Bank of America and Citigroup all took steps to ban or restrict the use of AI tools on security concerns[2].

The disruptive potential of generative AI has attracted the attention of global regulators. The CMA, the UK competition watchdog, announced last week they will launch a formal review of the AI market. They want to make sure that proper guardrails are in place to ensure consumers are being protected[3].

The equity market has been quick to adjust the market values of companies based on the expected impact, positive or negative, from AI. Researchers analysed company earnings calls to work out who benefits and who loses due to ChatGPT. They found evidence that companies with positive exposure to AI, those companies who could most likely integrate AI tools to improve productivity, have outperformed companies with negative exposure by a significant margin since the release of ChatGPT. [4]

Chegg might be one of the first companies to feel the pressure from ChatGPT but it surely won’t be the last. The AI genie is out of the bottle and affected companies will have to adapt if they want to stay relevant to their customers.

2) Copper fever is spreading

Copper has a critical part to play if we want to successfully transition away from a hydrocarbon based economy.

Electric cars use around 3 times more copper than petrol cars. Renewable energy projects need up to five times more copper than the gas, coal or nuclear power plants they are replacing[5]. On top of this, globally we also need new distribution networks to get electricity from newly built solar and wind farms to the cities where it's needed.

A recent McKinsey report estimates that globally we need almost 37mn metric tons of copper by 2031[6]. Goldman Sachs analysts think we need even more at 40mn tons [7]. Globally, we currently produce about 25mn metric tons of copper per year and new mines coming online between now and 2031 will only get us to around 31mn metric tons. This means by 2031 demand for copper could outstrip supply by more than 6mn tons.

It sounds like an easy problem to solve. Just build more mines. But it's not that easy. We have already mined most of the world's easily accessible, high grade copper. Newer mines have to deal with more complexity and lower grade ore. There’s another problem. Getting a new copper mine up and running can take more than 10 years. In some cases it has taken almost 30 years to get a large mine to full production. This means any new copper mine we start today likely won’t be adding to supply until 2035 or even 2040 [8].

This looming potential shortage of copper has not gone unnoticed by big miners. Mining M&A has picked up recently as miners jostle to buy up existing copper assets. Recently Glencore made an unsolicited $23bn offer for Teck Resources, BHP made a bid for Oz Minerals and Rio Tinto took over Turquoise Hill. But simply shifting around who owns what does little to increase global copper supply[9].

One thing seems clear to us here. If we hope to achieve our net zero goals by 2050 the world needs to increase its supply of copper over the medium term.

3) BNPL incumbents under pressure

The pandemic had a profound impact on digital payments. As consumers were forced to do more shopping from home, digital payment companies had to evolve fast. One of the more notable developments has been the explosive growth in buy now pay later (BNPL) loans.

BNPL is a form of short term credit where you can split payments for goods and services over instalments, often paying little or no interest. BNPL loans from companies like Klarna compete with more traditional forms of unsecured lending like credit cards.

Getting a BNPL loan is often easier than getting a credit card, especially if you have a lower credit score[10]. Research from Bain also suggests that even with late fees, BNPL can be cheaper than credit cards[11]. These factors have contributed to explosive growth over the last few years. In 2019 the five biggest BNPL players made $2bn in loans. By 2021 this number had swelled to more than $24bn [12]. But things could be changing for the incumbents.

Apple, the biggest company by market cap, recently launched their own Apple Pay Later product in the US. Apple could be a serious competitor in the BNPL space. iOS has more than 50% of the US smartphone market and they plan to embed their product right into the iOS operating system. Apple also has close to 1bn customers globally that already use its services. These are all potential customers. [13]

New competitors aren’t the only difficulties faced by BNPL incumbents. The major BNPL players don’t operate like traditional banks. They don’t have access to relatively cheap customer deposits to fund the loans they make. They have to borrow the money they lend out to customers from elsewhere. Rising interest rates and the risk of a recession are putting profitability under pressure.

As a result, companies like Klarna and Affirm are shifting their focus towards profitability. This shift has seen some BNPL companies tighten credit standards to manage the risks of non-performing loans. This means more customers are being rejected when they apply for BNPL loans and it could lead to slower customer growth [14]. At some companies the focus on profitability has also resulted in a shift away from short-term zero interest loans towards longer-term loans that include interest fees [15].

The BNPL industry is evolving fast. Large new competitors, increasing scrutiny from regulators and a more difficult operating environment could put established players under a lot of pressure. We’re keeping a close eye on this space.

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