The demand for copper is expected to overshoot supply by a significant margin in the future, leading some in the industry to predict that copper could be the next gold rush. For this reason, TheBull decided to take the time to investigate the trends in copper, the forecasts and the copper stocks that could stand to benefit.
The copper market
Did you know that copper was the first metal to be used by man? Perhaps as early as a few thousand years ago, it was used as a substitute for stone during the Bronze Age. Copper’s dominance came to an end with the discovery of iron, which started the Iron Age.
Nowadays, the metal’s primary use is in electrical applications because of its two physical properties: superb conductivity and malleability. Malleability means that it can be made into wires or flattened into sheets without breaking. Copper markets are different from gold markets because, unlike the forces that drive the gold markets, which are affected by artisans’ demand for jewelry-making or by investors as a hedge against inflation, copper’s demand drivers are primarily industrial-manufacturing and construction. Although copper can be substituted with aluminum, plastic or steel in the construction industry, it is irreplaceable in electrical applications.
Investors consider copper an indicator of economic health since it is used in construction, power generation and transmission, electronic products, industrial machineries, appliances, heating and cooling systems, telecommunication links, motors, wiring, radiators, connectors, brakes and bearings in all cars, trucks and transportation vehicles. All of the above are associated with healthy economic activity.
Source: Resource Capital Research
Considering copper’s uses, it is not surprising that China plays a major role in this market. Following a year of extraordinary copper demand growth of 38% in 2009, China’s consumption in 2010 grew by only 4.3%. However, it accounted for about 40% of global copper demand. By comparison, North America claims only 10% of the global demand, which is a whole lot less considering that in the 1990s, the USA alone accounted for 20% of global copper demand (see graph below). In 2011, the Chinese demand growth rate is projected to be higher, at about 6% due to an anticipated growth in semi-fabricate production and restocking of working inventories.
Source: Resource Capital Research
Copper’s Bright Red Forecast
Industry insiders believe that another bullish element of copper demand is the move towards a cleaner environment and “green” electrical vehicles, since more copper will be used for the manufacturing of each vehicle and more electrical vehicles will be purchased. As a matter of fact, electric cars have 150 to 180 pounds of copper, which is almost three times the amount of copper needed by a typical petroleum powered car – 50 to 55 pounds. Ivanhoe’s Mines CEO, Robert Friedland, reasons that the demand for copper will grow exponentially in the next few decades. The numbers are definitely compelling: in the last 100 years approximately 600 million tons of the red metal were mined. His projection is that in the next two decades the world will need another 600 million tons for two reasons: copper makes 80% of the weight of an automobile’s battery and 500 million people will purchase electric cars. Friedland’s optimism regarding copper’s future demand is congruent with Richard Schodde’s (founder of MinEx) finding that “over the next 23 years copper consumption will be roughly equivalent to all the copper that has ever been mined in human history.”
However, demand is just part of the story. Recently, supply has failed to keep up with demand. According to ICSG (International Copper Study Group), global growth in copper demand for 2011 is expected to exceed global growth in copper production, and the annual production deficit, estimated at about 250,000 metric tons of refined copper in 2010, is expected to increase to about 380,000 tons in 2011.
Industry Insiders – Projects Needed
Schodde contends that the world’s copper resource base has increased 25 folds over the last century, and much of this increase is attributable to new discoveries. “Costs were reduced through economies of scale 30%, and new technologies 70%. Prices are an output-not an input,” since the big driver of copper prices is high supply. Schodde believes that copper prices will remain strong for the 2011-2012 and a major gap between supply and demand will open up after 2020. This is why new copper projects are needed, he added. However, in the near term at least, most production increases will come from re-opening of projects that were abandoned in 2008, and less from new start-up operations.
Peter Reeve, CEO of Ivanhoe Australia, is also very bullish in the long run, saying that the industry needs about 35 copper discoveries over the next 15 years to keep up with the demand generated by population growth, and “we are vastly under-exploring.” The challenge faced right now by the industry is that most undeveloped projects are located in risky countries. There is a trend of mergers and acquisitions in place especially for undeveloped projects, since companies are trying to hedge their risk.
The dark side of high demand, insufficient supply and therefore higher prices, is that producers start searching for more affordable alternatives. Nevertheless, Reeve is not very worried about it, since only 2% of it can be replaced with cheaper materials, and the cost of retooling factories will be “astronomical.”
Australia is one of the lucky countries that has significant copper resources. Globally, the top copper producing countries are Chile, USA, Peru, China, Indonesia, Australia, Russia, Canada, and Poland. Australia’s largest copper mine is The Olympic Dam, located approximately 550 km NNW of Adelaide. In addition to copper, uranium, gold and silver are also extracted from the mine. It is the fourth largest copper deposit and the largest known single deposit of uranium in the world, though uranium represents only a minority of the mine’s total revenue.
So, you may ask: how can I get started with copper? You can look into mining companies traded on ASX, such as Ivanhoe Australia (IVA), BHP Billiton (BHP), OZ Minerals (OZL), Copper Range Limited (CRJ), Jervois Mining Limited (JRV), Matrix Metals Limited (MRX) or Newcrest Mining Limited (NCM).
Shodde advises investors “any Junior company with a decent, or even half-decent, copper project will be in a favored position for the next few years.”
Copper is traded on three metals futures exchanges around the world: LME (London Metal Exchange, contract code CA), CME (Chicago Mercantile Exchange, symbol HG), SHFE (Shanghai Futures Exchange). From my experience, trading copper options on the CME, copper markets seem to be less liquid than gold or silver options.
Investor’s Point of View
Although Goldman Sachs lowered its near-term price forecasts for copper, citing fragile global markets, it believes that the negative sentiment will wear off, as analysts will look to the longer-term, global picture, which shows that in the grand scheme of things, the economy is improving.
Metals have experienced quite a bit of volatility in 2011. While gold’s uptrend is intact, silver had a bloody sell-off in May. Although copper is off its heights from February, it is obvious that the up-trend is still in place, and copper recovered some off its losses. Such a pullback is not unusual after eight straight months of continuous climbing.
As you notice on copper’s (CME, symbol HG, September 2011 continuous contract & 9-month moving average) monthly chart below, the price is close to its 2008 heights.
From my experience trading metals, although riding the uptrend is nice, metals tend to have violent and abrupt sell-offs; therefore, one should protect their capital by purchasing “put” options or having a stop-loss strategy in place. Copper is one market that is particularly sensitive to economic reports.
In the medical field copper is well known for its antimicrobial properties. The world’s first antimicrobial AC was launched in Beijing; it also has record-breaking energy saving performance. At the other side of the Pacific, Americans have done some research too, trying to figure out a way to curtail hospital-acquired infections, which kill one of twenty patients who acquire them. In other words, hospital-acquired infections kill more people than HIV and breast cancer combined, says microbiologist Michael Schmidt. The US Military’s Telemedicine and Advanced Technology Research Center (TATRC) found out that the microbial burden associated with copper surfaces was substantially lower than the non-copper counterparts in the rooms studied. “The greater the concentration of copper that you have in your alloy, the faster it kills bacteria. “
Copper’s price rise attracts a different category of participants: thieves. They break into buildings and steal copper pipes, phone and power lines wires, AC units copper core, or statues. In many cases the damage caused to properties is far greater than the value of the copper stolen.
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