If you’re going to be invested in a single metal this decade, my advice is to back copper. Specifically – companies that are sitting on long-life, high-quality copper resources.
He dropped out of the spot light for a while there, but ‘Doctor Copper’ is making some big moves again. The copper price fell nearly 25% earlier this year after the 2009 rally. But whilst gold hogged the headlines copper has snuck back up the chart again.
It is now only about 3% from hitting a two year high.
This latest bounce could well be the start of another decent rally too. The chart below shows the price in dark blue. In orange is the short-term trend, and the light blue is the long-term trend. Not too long ago, the two lines crossed over, and you can on the chart that this usually signals a big turning point in the market.
So what’s going on here? And how can you profit from it?
Copper is used in a whole bunch of things that are involved in economic growth – building national power grids, the mass production of electronic goods, and putting the plumbing in new tower blocks and so on. That’s why it’s called Doctor Copper (Phd in Economics).
Does this mean the global economic woes are over?
I don’t know. It’s certainly a confusing message we’re being sent. Uncertainty and volatility are still extreme, bad numbers keep pouring out of Europe. I’ll leave it the macro guys like Dan and Nick to solve the riddle of why copper is rallying NOW when a lot of economic problems are yet to be fixed.
What I’m interested in – and YOU should be too – is the market for this metal over the next ten years.
Put bluntly: the copper market is already huge… and it’s about to get a whole lot bigger. Global copper consumption for this year is expected to be around 17 million tonnes. At the current price the global copper metal market should be worth about US$125 billion this year. To put that in context, the global copper market is about the same size as New Zealand’s economy.
So who is buying it now?
Last year, China was the biggest user of the red metal, with 28% of demand. Construction firms used 48% of global supply last year. Manufacturing of electrical and electronic appliances takes 20%. Transport takes about 10%, and the power sector takes 5%.
The commodity data coming out of China shows that demand isn’t slowing either. Copper imports are in the rise at the moment, jumping 10.7% last month. China is importing even more ‘copper scrap’, which is just reclaimed copper from buildings and so on. Imports of this jumped by 5.3% last month.
Why’s China buying up copper? Maybe because a MAJOR copper shortage is coming…
Copper inventories have steadily declined since peaking in February.
According to the Metals Economics Group, significant copper discoveries have fallen “well short of what is needed to replace the copper produced.”
Morningstar predicts “60% of today’s open pit mines will deplete or go underground (at a higher-cost) by 2021.” Rio Tinto is racing to open new mines to meet a massive “shortage coming in 2011 as United States and European demand also rises”
One mining executive has admitted to Salon.com: “Globally, economic copper resources are being depleted with the equivalent production of three world-class copper mines being consumed annually.“
To make money as a resource investor you need to find the high ground… so you can see over the hubbub of the daily markets… and catch a glimpse of the next big high demand/low supply story.
For me, that story is copper.
My advice: Buy well-priced companies sitting on high-quality copper resources.
Dr Alex Cowie
Editor, Diggers and Drillers
for Markets and Money