Five-year...ten-year...20...then 25-year...now ALL TIME highs - copper prices are literally going nuts.
The copper bull story is quickly told and quickly grasped when you see the performance of Phelps Dodge, (one of the world's largest producers of the metal) in the past 16 months:
- Supply is down - Chile's production has slipped and new mines aren't being discovered. Prospectors haven't found any easy (cheap) new fields in 100 years. In short, we're running low on supplies... dangerously low.
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- Demand is through the roof - Copper is needed for wiring and plumbing and there is seemingly no viable substitute.
China's roaring economic growth is being powered by a massive build-out of the electrical grid, and this demand alone has shaken the delicate balance that held copper below $1 a pound for decades. And I mean shaken it to the ground: at $2.30 a pound, which it has now hit, we are in uncharted territory.
Investing in copper: Indispensable uses
Though copper is neither a precious metal nor a source of energy, it boasts indispensable industrial, technological and economic uses...it's one of the
most important nonferrous commodities today.
Prices have soared in the last four years with all-time highs being achieved this week. Those companies that produce and sell copper have watched their revenues and profits skyrocket in this time, and have consequentially provided their shareholders with very handsome gains.
In the 1980s and 1990s commodities were beaten and battered. Inventories were full, mines and drills were shut down left, right and centre, and for all consumption purposes, commodities were cheap and easy to get. Aside from the occasional bear-market rally, from an investor's standpoint commodities were the dogs of the markets.
Well, how times have changed...The global economy is growing at a fast and furious pace led by the super-economies of China and India.
Investing in copper: Supply and demand
Commodities that were once undervalued are now starting to rise in price due to the simple economic imbalance of supply and demand. Industrial
development and growth in manufacturing and high technology have kicked up demand for the various natural resources used in their production causing global inventories to sharply decline as they struggle to keep up with this new-found demand.
Copper falls comfortably into this cycle and China's voracious appetite for this metal has almost single-handedly emptied warehouses, drastically decreasing worldwide stock levels.
Look what happened in July of last year...copper stocks at the London Metals Exchange (LME) hit 31-year lows of 25,550 tonnes...the equivalent of less than two days of global consumption. The hundreds of warehouses around the world, most commissioned and approved by the major metal exchanges (LME, COMEX, SHFE) have seen their inventories hit dangerously low levels.
According to Zeal.com, China's demand for copper has hit such extremes that in 2002 it created a large state-owned enterprise to exploit the international development of nonferrous metals, mainly copper. The
firm is called China Nonferrous Metal Mining & Construction Co., Ltd. (CNMC). Nearly four years later CNMC has operations in over 30 different
countries and is aggressively feeding its smelters back home.
Investing in copper: '...exploit overseas mineral resources'
Upon CNMC's creation, Zhang Jian, general manager of China Nonferrous Metal Industry's Foreign Engineering and Construction Group Company (CNFC) said, 'It is of strategic significance to China's economic
development to set up a long-term and stable overseas mineral resources supply base. However many domestic small-scale nonferrous companies are incapable of solely tapping mines abroad. The only way is to jointly exploit overseas mineral resources.'
With China as well as many other growing economies drawing down global inventories, it becomes clear why copper prices are on the rise and why we are currently facing a global copper deficit.
Investing in copper: How to play the bull run
So how do you play this bull-run in copper?
First and most important, just like any other metal pulled from the ground, copper is dependent on miners to ultimately provide the supply.
To keep up with today and tomorrow's copper demand, mined output will need to increase.
Sounds simple...but as with all metals, ramping up production and opening up new mines requires significant time and capital. And I reckon it's
during that time, or cycle, that investors have the opportunity to take advantage of rising prices.
The USA's Copper Development Association (CDA) estimates that global copper resources are nearly 6 trillion pounds. The CDA also estimates that
throughout history only 700 billion pounds of copper have been mined.
These massive reserves coupled with copper's high recycle rate show we have no imminent risk of ever running out of the stuff. So for copper it is not an issue of rarity or store of value, rather a matter of ramping up supply to meet demand. And just like all commodities, until this happens, market forces will adjust the prices accordingly in the upwards direction and give investors the opportunity to go long and profit...
And that's exactly what traders are doing today ...
Investing in copper: Recent movements
Momentum-based buying and a continuing strike against Grupo Mexico - causing the company to declare a force majeure - enabled new copper futures to finish with a gain on Tuesday.
However, the metal did back down from its record overnight highs on profit-taking. Contributing factors to this included a pullback in energy and
other precious metals and expectations that a run-off will be needed in the Peruvian presidential elections.
The most-active May copper contract settled up 1.25 cents to $2.7215 per pound on the Comex division of the New York Mercantile Exchange.
Three-month copper in London managed to sneak just above $6,000 a metric tonne earlier in the day, and Comex May copper got as high as $2.7380 overnight.
Some of the support came from news that Grupo Mexico declared a force majeure on some deliveries of copper and molybdenum after a strike at the La Caridad copper mine. The strike itself, which began on the 24th March, also remains a supportive influence explained Dan Vaught, futures analyst with A.G. Edwards.
'They're still talking and it sounds like they're pretty far apart,' he said.
Investing in copper: Speculative and investment buying
One trader commented that Comex May copper has now put in a fresh contract high 10 business days in a row. Speculative and investment buying has continued.
'There is a very tight basic supply/demand balance around the world, and economic growth has been surprisingly strong so far this year,' said Patricia Mohr, vice president with Scotiabank.
Traders in New York and London alike commented that the metal pulled back from the overnight highs on long liquidation. The May futures slipped to $2.6830 overnight, and were lower for a while in early pit trading, before regaining their footing.
'You saw profit-taking,' said one trader.
Vaught attributed some of copper's strength to 'overall upward momentum.' Also, he pointed out that the dollar was softer as copper was closing, which does tend to help metals.
Vaught commented that some of the pullback from copper's fresh highs may be a reaction to news reports suggesting a run-off may be needed in the Peruvian presidential election. The front-runner is not expected to have a majority in the Sunday vote. Some of copper's strength on Monday was because the front-runner, nationalist candidate Ollanta Humala,
is viewed as favouring increased taxes and regulation on the mining industry, which could, overtime, reduce output.
Vaught also attributed some of copper's pullback to other markets being unable to sustain earlier momentum. Comex gold set a 25-year high overnight but June futures were down roughly $3 as gold was closing. Also, May crude was little changed near Monday's $68.74 close after peaking at $69.45 overnight.
Right now we are seeing some weakness in response to the addition to LME stockpiles overnight. Inventories of copper in London Metal Exchange warehouses rose 550 metric tonnes Tuesday, leaving them at 112,350
metric tonnes.
Investing in copper: Comex stocks data
The most recent Comex stocks data, released late Monday afternoon, were down 369 short tonnes at 19,020 short tonnes. If you ask me, this is a short-term measure to stave back prices. But it can't last.
J
ust watch copper fly...
Though copper has no store of value, its innumerable industrial uses are absolutely invaluable.
The geopolitics of copper also play an important role in today's copper market. And Chile is the biggest player in there. More copper comes out of Chile than any other country in the world, by far.
Much of it is mined by state-owned firm Codelco, but a massive international presence is aggressively increasing its stake into the rich Chilean copper regions. The copper industry is so big along the Pan
American Highway, especially in Chile and Peru, that it has become the lifeblood of their economies.
But this can pose risks too...
Only June of last year a 7.9 magnitude earthquake rattled the country halting all mining operations.
Also towards the end of last year sizable strikes by Chilean mining employees temporarily hampered production.
Many analysts believe the earthquakes and strikes in Chile are what sustained and pushed higher copper prices last year out of fear that production would be seriously depressed. But according to Cochilco, those
anomalies were insignificant in regard to annual production estimates.
One thing's for sure, however...until there is equilibrium in global supply and demand, copper prices will remain high and most likely move even
higher.
Investing in copper: Taking advantage
The question is, how can you take advantage of the copper bull market and leverage some of your capital?
Just like the usual suspects of gold, silver and oil...you buy the stocks of its producers.
Since 2001, the top four copper producers trading on the US exchanges have averaged gains in excess of 450%, with some of the smaller miners doing just as well if not better. As copper prices continue to
rise, so will the stock market gains of its producers.
There are two key ingredients that go into choosing the companies in which to invest your hard-earned capital, says Justice Litle, editor of Outstanding Investments.
'The first is timing, and second are the fundamentals of the individual companies. Both of these ingredients take much time and research. But it's worth doing.
'Timing the deployment of capital involves analysing the fundamental and technical trends of the copper market. If you are trading for the long-term then it is simplest to buy on the dips and ride out the copper bull. If you are more of a short-term or momentum player, then a little bit more goes into your entry and exit points.
'Picking the individual companies that are best positioned to leverage the price of copper involves legwork as well. Of course there are always the
biggest and best blue-chip producers, but opportunities are also abound in the intermediate and smaller miners and explorers. But extreme caution and prudence need to be taken in choosing these smaller
cap companies.'
Investing in copper: '...the opportunity for legendary gains'
The bottom line is that the reddish metal we call copper continues to show future promise in this exciting secular bull market. Global inventories are
down and demand is up as the world economy grows.
Whereas in the 1980s and 1990s commodities producers, including copper, were the black plague of stock investing...today's commodities bull presents the opportunity for legendary gains to investors and
speculators.
by Keith Cotterill for the Daily Reckoning. You can read more from Keith and many others at www.dailyreckoning.co.uk
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