AI is driving the stock market rally this year. To meet the electricity demand of power-hungry data centers, strategists expect to see major investments in the electrical grid, as well as demand shocks for critical metals.
VettaFi contributor Dan Mika recently spoke with Jay Jacobs, U.S. head of thematic and active ETFs at BlackRock. Jacobs discussed the opportunities at play amid growing power demand due to larger efforts to decarbonize the global economy.
This interview has been edited for clarity and brevity.
Dan Mika, VettaFi: A key theme in the iShares Thematic Mid-Year Update is the increasing demand for electric infrastructure to power AI data centers. As you note, it sounds like there’s going to be a clash between the demand from AI companies and the demand from climate tech companies for critical materials, like copper or semiconductors. Will we be able to meet demand from AI and climate tech companies? If not, do you think either will be prioritized by suppliers?
Jay Jacobs, BlackRock: The demand for these materials and infrastructure is coming from several places. Electricity demand hasn’t really grown in the United States for 15 years. However, you have this new growing demand source from artificial intelligence. Additionally, growing demand for electric vehicles and growing demand from manufacturing, which is undergoing a renaissance as well.
Several themes are pointing in the direction of the need for more electric generation, more electricity transmission, storage, as well as some of the materials that go into it, like copper. What this is driving towards is a massive need for energy infrastructure. This is a build-out across that entire ecosystem of generation, transmission, and storage.
It’s difficult to say who’s going to be the most active buyer in the space. I think all these industries are going to be competing for something that might be in short supply in the near term, until you can really field the demand.
VettaFi: It takes between one to two decades for a new copper mine to be permitted and begin producing copper. I’m wondering what you think the time horizon of the theme will be, between the current demand for AI, where data centers are expected to create a huge amount of additional demand for electricity while the supply of copper can’t quite scale as quickly. How long do you think it’ll take for copper and other critical material prices to be squeezed by new demand?
Jacobs: It won’t take long. Copper is already in undersupply, and that undersupply is projected to be persistent for several years into the future. What tends to happen is the commodity is going to go to the most profitable use case. This is where the buyer is willing to spend the most money to secure access to that commodity.
Artificial intelligence data center building is backed by some of the most profitable companies in the world. They have a pretty powerful economic incentive to lead in AI. They likely will be significant buyers of copper. But there’s a lot of different industries that need copper, from infrastructure to automobiles to electronics, construction, you name it.
So, the question is: Are there other materials they can switch to? Or can you accelerate the development of more copper production through more supportive policy, more dollars invested? I think all options will be what happens. There will be some switching, and there’ll be some motivation around the world to accelerate production.
VettaFi: You mentioned the immense economic incentive for AI companies to be leading the charge on this. Do you anticipate that might cause a slowdown in the electrification of the world? As we try to move to net-zero, or something resembling that, does the electricity demand from AI pose an obstacle?
Jacobs: I think the AI demand for electricity is part of a broader story around how we supply the next generation of electricity demand, which is growth from many different sources. I think what the result will be is just really a rethink of energy production and infrastructure investment. What are the different sources of it? How do we meet higher needs for electricity in the U.S. and around the world?
My optimistic view is that AI’s demand is going to accelerate those conversations, whether it’s in the private sector or the public sector, around how we really ramp up electricity generation. I don’t think it’s either/or, I think this is a contribution to the total amount of electricity demand that’s going to be needed. That should be accelerating how we think about utility scale and power generation across the country.
VettaFi: Geopolitics is clearly at play here, as the outlook gets into. I’m wondering if there is anything we can learn from recent history in terms of how the supply chains are going to deal with an excess of demand being placed for critical materials. I’m thinking back to the pandemic, when N95 masks were deeply strained. We’re now in a far more protectionist economic mood among the world’s major players. Do you think that could cause any problems for scaling up electric infrastructure right now or in the near future?
Jacobs: We’re not seeing that now. What we are seeing is that there’s a strong push for securing economic drivers in the future. We saw that with the CHIPS and Science Act there was really a bipartisan push to be supporting the development of semiconductors in the U.S. These are absolutely critical to so many different industries in the U.S. that we want to make sure we’re securing supply chains.
I think the logical next step is to go one step further up the supply chain and look at critical materials as well. We’ve seen some effort to look for domestic sources in areas like lithium, but all this mining and extraction takes time. But I wouldn’t be surprised if that expanded to other materials as well.
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