by Tony D’Altorio, Investment U Research
Thursday, September 30, 2010
Forget gold for a moment and let’s focus on copper instead. It’ll be well worth the time…
Earlier this year, copper prices fell 25% from its 2009 rally on fears of a double-dip recession. Those fears have eased enough at least to let the commodity bound back up to $7,700 a ton on the London Metals Exchange (LME).
That puts it only 3% from a 2-year high and not far from its all-time peak.
Sometimes called “Doctor Copper,” you could say it has a PhD in economics as it oftentimes signals strong growth trends. When countries start buying it up, they usually do so to advance national power grids, plumbing for new buildings and mass production of electronic goods.
Just look at the sectors that bought the most copper last year. Construction firms used 48%, manufacturers of electrical and electronic appliances used 20%, transportation 10% and the power sector 5%.
In other words, economies that can’t get enough of copper are growing. And considering who’s buying it up these days, copper prices should keep going up as well.
China Stockpiles Copper… Is a Shortage Coming?
Last year, China used the most copper, with 28% of demand. Europe came next with 25%, the U.S. with 14%, Japan with 5% and the rest of the world used 28%.
And recent data coming out of China shows demand picking up.
Copper imports jumped 10.7% last month. And the country even imported 5.3% more copper scrap, reclaimed from buildings and such.
Many bears say China is only stockpiling copper. But if so, it has good reason to do so.
The Chinese see copper inventories at the LME declining steadily since February. Normally, they rise during the summer months, but instead, they’ve declined 25%.
They believe a major copper shortage is coming, which is why they’re stocking up on it. Investors should take careful note.
The Real Story on Copper
For the real story on copper, you have to turn to the supply side of the equation.
Superstar copper mines of the 1980s, like Chile’s Escondida, likely already saw their best days. And overall, few industry insiders believe there is enough new production coming onstream in the next few years to meet even a very modest increase in demand.
Even if the global economy falters again, the balance between supply and demand doesn’t look bearish. Too many past years of disappointing production have seen to that.
In the first half of 2010, the world’s four top listed global copper miners – Freeport McMoran (NYSE: FCX), BHP Billiton ADR (NYSE: BHP), Xstrata ADR (OTC: XSRAY) and Rio Tinto (NYSE: RTP) – saw their collective output drop 12% from 2009.
State-owned Chilean Codelco, the world’s largest copper producer, said in May that it expected similar output in 2010 to the previous year; hardly a good sign. And overall, the copper mining industry has undershot production expectations by an annual average 6% in the past five years.
Much of the problem stems from lower quality ore. After years of intensive output, many mines developed in the 1980s now produce ore with ever-lower copper content. This means they have to work harder just to keep output steady.
Still, even lower-grade ore is in high demand. Morningstar predicts that “60% of today’s open pit mines will deplete or go underground [at much higher costs] by 2021.”
Two decades of low prices gave most big mining companies little incentive to invest in finding new deposits. Plus, Wall Street bankers didn’t easily sign over loans to these businesses, choosing to invest in more glamorous opportunities instead.
And copper mines take as long as 15 years to start producing from the initial investment. So there is very little that can be done to match consumption for the next five years or so.
Despite fears over the global economy, copper demand remains robust while supplies dwindle… an ideal investment situation.
This new norm means higher copper prices in the years ahead. The metal could even easily hit $9,000 a ton in the next year or $10,000 a ton in the next few years.
CEO Tom Albanese of Rio Tinto captured both the supply and demand sides when he said of the company’s 2010 first half results, “We could have sold more copper if we’d had it.”
Yet his company and its main rivals mentioned earlier should all profit from the trend. So should two particular ETFs, Global X Copper Miners (NYSE: COPX) and First Trust ISE Global Copper Index Fund (NYSE: CU).
Or there’s the iPath Dow Jones-UBS Copper Subindex Total Return ETN (NYSE: JJC), which tracks the price of copper futures on the COMEX.
But one way or the other, the copper market looks bullish for some time to come.