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How to Prepare for the Storm Brewing in Copper
Tony Daltorio, The Investment U Research Team
There is a copper-red sky this morning – it reminds me that a serious “storm” is brewing for Copper.
Copper is one of the most important commodities in the world. It is a key component of the engine powering the vehicle called ‘global economic growth.’
The widely used reddish metal is a vitally important element in global industrial development. Much of the world’s infrastructure – construction, transportation, telecommunications, etc. – depends on copper.
Yet, copper is rarely mentioned on Wall Street. It is dismissed as “only” a commodity.
When copper is discussed, the full story is never told. At best, it is mentioned that copper demand has fallen in the United States because of the recession. Fair enough. But there is a lot more to the copper story than just demand in the United States. Here’s what they’re missing, and a number of ways investors can profit from the reddish metal.
Demand for Copper
The latest report from the International Copper Study Group (ICSG) indicated that global demand for refined copper remained robust, as global consumption exceeded production by 37,000 tons between January and April.
Much of the growing global demand for copper comes not from the United States or Europe, but from the emerging economies around the world – China in particular. As with other commodities, China has completely changed the game and the historical supply/demand trends for copper with its voracious demand.
China’s copper consumption grew from about 1.8 million metric tons in 2000 to nearly 5 million metric tons in 2008. This pushed China’s share of global copper consumption from 13 percent in 2000 to 28.5 percent in 2008.
In the first quarter of 2009, estimates are that China accounted for 38 percent of world copper usage. The latest figures show that China reported record imports of refined copper for a successive fifth month in June.
Demand for copper has increased sharply in other emerging economies, but none on nearly the same scale as China. For example, Russia’s copper demand increased 300 percent from 2000 to 2008, but its overall share of global copper demand is still just 4 percent.
Supply of Copper
We find the other part of the story about copper – the supply side – even more exciting for investors looking to make a profit. The supply side of the copper story is being ignored completely by Wall Street.
There are very legitimate fears that the copper market could face a supply squeeze. These fears have been fueled by downward revisions for global copper mine capacity from the International Copper Study Group (ICSG).
The ICSG’s latest forecast is for global copper mine capacity growth to average 3.8 percent annually over the next five years. As recently as March, the ICSG was forecasting annual mine capacity growth of 5 percent over the next five years.
The sharp downward revision to their forecast came about because the ICSG discovered that there was a lack of available financing for many future projects because of the global credit crunch.
This forecast comes in addition to the fact that copper inventory stocks are already at critically low levels, despite the worldwide recession. Inventories at the London Metal Exchange stand at just over 268,000 tons, sufficient for just five days of global consumption.
Copper Bull Market?
The fundamentals in the copper market are setting the stage for another bull run.
Overall global demand for copper is unlikely to decline. Emerging economies will continue to build-out their infrastructure as the standard of living for their populations rise.
Supply constraints for copper will really begin to bite once recovery in the global economy gains traction and becomes more widespread. One possible sign of that happening is the statement from BHP Billiton ADR (NYSE: BHP) made on July 22.
BHP stated that metals restocking was evident in the United States, Europe and Japan. Businesses have realized the position we’re in and have started to accumulate what they can.
Fears over limited supply have already pushed copper prices to a high for the year – at $5,500 a ton. Copper prices have risen in excess of 75 percent this year but remain almost 40 percent below the record $8930 reached in July 2008.
The copper market will pay a heavy price for the simultaneous price collapse and tightening in credit markets since September 2008.
Playing a Copper Rally
The upcoming “storm” in the copper market should lead to serious gains for investors. And while there are a number of ways to play it, here are some of the easiest ways to profit.
There are a number of exchange-traded notes (ETNs) or debt securities that offer investors exposure to copper. Some include smaller amounts with other metals, while others focus entirely on copper. These ETNs include:
- UBS E-TRACS CMCI Industrial Metals Total Return (UBM) (42% copper)
- Invesco PowerShares DB Base Metals Long (BDG) (33.33% copper)
- iPath Dow Jones-UBS Industrial Metals Subindex Total Return (JJM) (43% copper)
- iPath Dow Jones-UBS Copper Subindex Total Return (JJC) (100% copper)
There is also an exchange-traded fund (ETF) which offers exposure to copper – the Invesco PowerShares DB Base Metals Fund (NYSE: DBB) which has 33.33% of the fund invested in copper futures.
You can also stick to individual stocks.
Investors should look for individual mining companies that have large copper mining projects. Examples include the world’s largest publicly traded copper company, Freeport McMoRan Copper & Gold (NYSE: FCX) and diversified mining giant, BHP Billiton.
With overall fundamentals for copper strong, investments into the reddish metal should earn savvy investors some substantial returns with rebounds in the global economic picture.
Good investing,
Tony Daltorio
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3 Responses to “How to Prepare for the Storm Brewing in Copper”
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August 9th, 2009 at 8:06 am
Thanks for this great article ,on Copper ,Looks like Silver will be a good buy at these prices any stocks that look good to buy ? Have a great Day GENE JANSSEN
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August 9th, 2009 at 12:27 pm
Please DATE all your reports!
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August 9th, 2009 at 1:14 pm
Great article. I have always found your articles very educational. thanks
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