Posted by mining | Posted in copper | Posted on 15-01-2012
Only a true contrarian investor could like copper. Copper prices are down. Copper prices have fallen $4.50 per pound to just over $3 per pound between August and September.
Copper is out of favor. Anytime the price of anything is falling – gold, stocks, bonds, etc. – the herd assumes “something must be wrong.”
The outlook for copper is getting worse. Investment banks, whose research drives the majority of money managers’ decisions, have been consistently lowering their copper forecasts. Goldman Sachs, Morgan Stanley, and Credit Suisse all cut their price forecasts within a week’s time.
Simply put, global economic malaise and fears of it getting worst have not been good to copper.
But Mineweb, one of the leading global commodity and mining research providers, says about copper, “Weak demand in the short term but stronger medium and long-term prospects.”
So what’s the verdict on copper? Buy, sell, or hold. As with all potential commodities, future of copper and will be determined by supply and demand.
The Boom, Bust, Boom
All commodities go through boom and bust cycles. Copper is no different.
Historically, the cycles take 10 to 30 years to play out. The average cycle has been 18 years between peak and trough.
Long lead times to bring new mines online, sudden surges of economic growth, and new technologies which require more of a certain commodity keep these cycles very long.
We are currently only a decade into the current boom cycle. History shows there’s probably another decade left to go on the upside.
Within the larger cycles, however, there are a number of smaller cycles that will create great entry points. We are currently in one of those downturns.
The chart below shows copper prices since this commodity cycle began a decade ago:
As you can see, the trend line is generally up, but it has been a very volatile market.
Copper prices got a little ahead of themselves in 2005. They corrected too quickly in 2008 during the credit crisis.
They sharply rebounded after that. The price of copper jumped soared from a 2008 low of $1.30 per pound to a new all-time high of more than $4.50 per pound in early 2011.
The copper party, again, didn’t last. Copper prices plummeted in the summer of 2011 as a sharp market- wide correction brought everything down with it. Copper didn’t escape the pain. A pound of copper lost a third of its value in only a few weeks time.
These up and down swings should be considered opportunities. Now that copper prices have fallen, it’s time to start buying.
The industry insiders see a potentially lucrative future for copper investors.
Mining Insiders Bullish on Copper
The big Wall Street banks, mining analysts, and traders may have taken,
Some people who know the industry best have taken a longer-term view.
For example, Dr. Gawen Jenkin, of the Department of Geology, University of Leicester, is a leader in the Geological Society of London (GSL).
When the GSL met to discuss the future of mining and demand for minerals, Dr. Jenkin summed up the situation fairly well:
Mobile phones contain copper, nickel, silver and zinc, aluminum, gold, lead, manganese, palladium, platinum and tin. More than a billion people will buy a mobile in a year — so that’s quite a lot of metal. And then there’s the neodymium in your laptop, the iron in your car, the aluminum in that soft drinks can — the list goes on…
Jenkin is right too. Copper specifically is found in all sorts of everyday products.
The world is getting richer. Global GDP is growing globally despite the economic malaise in the West.
Hundreds of millions of consumers around the world have steadily increasing disposable incomes. They’re buying more goods than they ever have before. And they’re consuming commodities at an unprecedented rate. And despite the bull market in commodities over the past decade, supply is still lagging behind demand.
Dr. Jenkins provided further proof of demand set to come. He cites a sliver of boom in an otherwise gloomy global job market.
Jenkins explains, “Exploration for metal commodities is now a key skill. It’s never been a better time to become an economic geologist, working with a mining company. It’s one of the better-kept secrets of employment in a recession-hit world.”
The long-term fundamentals are in place for copper demand and copper prices to continue their rise. And in commodities any significant price move will always be driven by supply and demand.
Stick to the Fundamentals: Supply and Demand
The supply/demand situation in copper isn’t much different than it has been for the last decade. The same imbalance which pushed copper prices up from 60 cents a pound to as high as $4.50 a pound are still in place.
Charlie Sartain, the chief executive of Xstrata Copper, says copper demand is set to grow just under 4% in 2011 while supply will grow by less than 2%.
The situation won’t change much in the near-term either. Sartain says copper demand should pick up to as much as 5% growth in 2012. And supply growth should set a record in 2012 by growing as much as 7%. Which, despite the record growth, is still short of demand and assumes no delays in any new mining projects coming online (anyone who invests in mining company developers knows the odds of this are quite slim).
He should know too. He runs the copper division of Xstrata, one of the world’s largest mining companies.
The supply/demand imbalance is bullish for copper in the short-term, but the long-term isn’t as clear.
Science Daily recently and sensibly stated, “There’s no immediate danger of ‘peak metal’ as there’s quite a lot in the ground, still — but there will be shortages and bottlenecks…”
They’re absolutely right. There is a lot of metal. There’s a lot of copper. But it’s all in the ground.
It’s completely worthless in the ground. It must be mined. And the lead times on a copper mine from discovery to production are usually at least eight years and, in most cases, usually take a decade or more.
So there is copper in the ground. The supply/demand imbalance will not last forever. As with every commodity boom in the past, it will be followed by a bust. It’s the nature of the industry. And this time won’t be any different.
But given the fundamental situation the industry insiders have described, the bust is likely five or ten years away.
Copper: A Contrarian Bet
In the end, the key to any investment is to go opposite the crowd – copper included.
The financial community is generally bearish on copper. General economic growth fears have driven down the outlook for copper demand. And they’ve been selling copper aggressively to the point where copper prices fell by more than 30% in a few months time.
The industry insiders, however, see the copper story unfolding much differently. They see demand continuing to grow steadily and supply growing, but not nearly fast enough to keep up with demand.
The mainstream pundits say sell, the industry insiders say buy.
It’s a situation only a true contrarian could like. But the rewards far outweigh the risks when it comes to investing in copper