–As a general rule, the most successful man in life is the man who has the best information-
In this author’s opinion, China, and to a lesser extent India and other developing nations, are responsible for the largest and longest base metals bull market the world has ever experienced. Many fear the bull market for natural resources is over when in fact nothing could be further from the truth. This seems especially true, because of the supply/demand picture, regarding copper.
Copper’s chemical and physical properties:
Copper is used for:
Copper’s price hit US$3.75 per pound in May 2006 after rising from a 60 year low of US$0.60lb in June 1999. By February of 2007 it had dropped to US$2.40lb but had rebounded to US$3.50lb by April 2007.
By February 2009 copper prices were – because of weakening global demand and a steep fall in commodity prices – at US$1.51 per pound.
Copper prices started a comeback and during the summer of 2009 and again during the summer of 2010 the price of copper defied conventional market wisdom – sell in May and go away – by rallying strongly and in 2010 managed to hold close to its recent highs coming into the end of August.
Copper inventories at the London Metal Exchange (LME) and Shanghai Futures Exchange have both seen dramatic reductions.
Copper exploration/development companies looking for or trying to develop deposits already found and copper miners looking to expand their production capacity are all facing some serious challenges:
“The reason why the prices are holding up so very high is that there has been only marginal increases in new copper mine development over the past five years.” Patricia Mohr, Vice President, Economics at Scotiabank Group in Toronto.
On August 24th 2010 The International Copper Study Group (ICSG) released preliminary data which showed world copper production fell short of refined usage by 190,000 tons in the first five months of 2010.
This author believes the full ICSG report showcases an underperforming industry and tells us there is the potential for a large copper demand/supply imbalance coming in the near future.
Also consider:
“There is no question that the current production numbers are to some degree validating that there is an issue starting to manifest itself on the supply side.” Mark Liinamaa, vice president of market research with Morgan Stanley.
“Prices are underscoring the relatively robust nature of physical conditions and from a business cycle perspective inventories remain fairly low. If economic conditions deteriorate there isn’t going to be that much destocking as manufacturers have been quite disciplined … The market is factoring in the fact that supply tightness is not going away.” Dan Brebner, analyst at Deutsche Bank
According to Barclays Commodities Research analysts copper is forecast to average $6989/t this year and $7763/t in 2011.
For 2011, BMO anticipates a global supply deficit of some 280,000 metric tons, with a price forecast of $3.70 a pound.
Investors have concerns:
China
“Copper consumption estimates for China are being revised up. Huge spending on copper-intensive power infrastructure on the state grid in ‘rural areas’ will continue through 2012 (12 bn RMB). Beijing has also renewed the ‘home appliance subsidy scheme’ and is promoting electric cars, which are twice as copper-intensive as conventional vehicles.” Patricia Mohr Scotiabank economist
Mohr also said that China’s demand for copper will grow 13% this year and by another 8-10% in 2011.
“I think the global growth story is back on. China, India, and Brazil, especially, are just growing by leaps and bounds … and they need the copper for housing and infrastructure.” Michael K. Smith, president of T & K Futures and Options Inc.
The Chinese are:
*Chinese urbanization
“The growth potential of the vast middle and western regions, together with the rapid development of small cities and towns, could keep the economy on the fast track for at least 15 to 20 years.” Wei Houkai, director of the center for China’s regional development at the Chinese Academy of Social Sciences (CASS)
India
“Every major industrialized country in the world has experienced a shift over time from a largely rural agrarian-dwelling population to one that lives in urban, nonagricultural centers. India will be no different. However India’s urbanization will be on a scale, that outside of China, is unprecedented.” McKinsey Global Institute’s report India’s Urban Awakening
India has 1.2 billion people and the second largest urban system in the world – currently 340 million people.
Less than 60 percent of the households in India’s cities have sanitation facilities, and less than half have tap water on their premises.
The share of the urban population in India is expected to reach 40% by 2021, and by 2011, urban areas could contribute around 65% of GDP.
A report done by the McKinsey Global Institute called India Urban Awakening predicts that 590 million people or 40% of the population will live in cities by 2030 up from 340 million today. By that time, Asia’s third largest economy would have 68 cities with populations over 1 million, up from 42 today.
With less than 1/3 of the population India’s urban areas generate over 2/3 of the country’s GDP and account for 90% of government revenues.
Scrap Copper
People have been using copper for over 10,000 years and recycling (it can be recycled without any loss of chemical or physical properties) almost as long – it has been estimated that at least 80% of all copper ever mined is still in existence.
Unfortunately:
“Indications are that demand in Europe, the US and Japan is holding up well and scrap has become very tight.” Barclays Commodities Research analysts
“Scrap (supply) is tight.” Edward Meir, analyst with MF Global
“There is little information regarding this market (talking about the scrap market); however, it has not been a decisive factor either for the demand or supply side of the copper market.” Juan Villarzu, former head of world’s largest copper company, Codelco
Conclusion
This author believes that the US and Europe are, or are in the process of becoming, mostly irrelevant when it comes to the demand side of the copper supply equation. Increased demand for the red metal in developing nations will more than make up for decreased demand in the western world. And when western economies recover, as they eventually must, then the supply squeeze will become even tighter.
The citizens of the worlds developing nations aspire to have what we have, the ease of travel, home phones, electricity, central plumbing, heating and air conditioning, cars, toys, consumer electronics and home appliances.
When you consider the recent lack of exploration spending, increasing demand from developing countries, country risk (the Democratic Republic of the Congo, the DRC, comes to mind) declining resources/grades at the world’s largest copper mines and that a sufficient number of new deposits that have been found are not being brought on stream in a timely enough fashion – and those that are, carry, for the most part, much lower grades than those presently being mined then you might be forgiven for coming to the same conclusion that I have – growth in global copper demand, at the same time supply is declining, seems likely.
China alone has one fifth of the world’s population, India another 1.2 billion people, most of them want the same quality of living and level of consumerism and materialism we enjoy in the west.
Could copper come into a major demand squeeze? Is the red metal on your radar screen?
If not, maybe it should be.
Richard (Rick) Mills
[email protected]
www.aheadoftheherd.com
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Richard is host of aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 200 websites, including: Wall Street Journal, SafeHaven, Market Oracle, USAToday, National Post, Stockhouse, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor and Financial Sense.
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