Despite a recent improvement in risk sentiment, copper prices are languishing. The commodity has fallen around 13% for the year and nearly 20% from its April peak. In part, that comes from a drop in copper imports to China. And China’s attempts to control inflation and property bubbles haven’t helped either. Add in double dip concerns about Europe and you get a very wary Wall Street. Bearish analysts have since forecasted further downward pressure on the commodity. But in focusing on just those facts, pessimists are missing out on the bigger picture. And the bigger picture shows a much more bullish outlook ahead…
Emerging Nations Demand For Copper
Few people notice any other emerging nations but China these days. But contrary to popular belief, others do exist… and they need copper too. For instance, India’s state-run Hindustan Copper recently said, “India’s copper demand will likely grow by at least 7% in 2010-11, fed by the power sector.” Energy consultancy Platts adds that India suffers from a peak power deficit of over 12%. To cope, the country has begun tendering nine major power transmission projects. Worth $12.3 billion together, they only await the OK from regulatory authorities.
Elsewhere in Asia, other power projects worth billions of dollars exist. And as they get underway, they’ll rely very heavily on copper. Of course, China does remain the dominant factor in price movements. It now accounts for about a third of global copper demand, up from near 25% in 2007.
So the bears do have a point when they note how imports to China dropped April – June. Though even that just means it’s drawing down some its inventory held in warehouses. According to Reuters, appetite for copper actually rose 5% in May from the prior month. “A fall in imports was offset by rising [domestic] output and a drop in stock levels.”
Copper bears also point to China’s efforts to burst the property bubble in the country. But according to Standard Chartered Bank, the real estate sector accounts for only about 10% of the country’s total copper consumption. Power generation accounts for the majority. And the build-out of China’s power grid isn’t slowing down anytime soon. Too many cities there continue to struggle with overloaded power infrastructure for that to happen.
Copper Supplies Point to Higher Prices
Fundamentals on copper’s supply side also point to higher prices. As with other base metals, copper mines have long lead times to come onstream. So most industry insiders expect demand to outstrip supply in the coming years. Developing new copper mines and expanding existing mines costs a lot as well. And that means there will be little growth in global production in the near future.
The February earthquake in Chile, the world’s largest copper producer, made it worse too. The quake didn’t damage the mining infrastructure there. But it did divert investment away from the sector and state-owned Codelco, the global leader in copper production. Also consider how the quality of copper taken from existing mines continues to fall. Credit Suisse even noted last month that mining companies are missing output forecasts because of that very problem. That has led Rio Tinto ADR (NYSE: RTP), the world’s fifth largest copper miner, to forecast a personal 15% fall in production this year.
Unfortunately, the company is representative of the larger industry. The world’s four largest producers of copper – Codelco, Freeport McMoran Copper & Gold (NYSE: FCX), BHP Billiton ADR (NYSE: BHP) and Xstrata ADR (PINK: XSRAY) – have been slow to respond to rising demand. That’s largely because of the quality issue. Naturally then, copper inventories have fallen as well. Worldwide, they have steadily declined. The London Metal Exchange (LME) has felt it especially, with stockpiles falling about 20% since med-February. Currently, it only holds about 8 days worth of global demand.
Copper Prices On the Fast Track to Great Gains
Needless to say, all of those factors put copper prices on the fast track to great gains.
To profit as well, investors can look into aforementioned stocks, like BHP and FCX. Or they can buy up shares of two well-placed ETFs:
- First Trust ISE Global Copper Index Fund (Nasdaq: CU)
- Global X Copper Miners ETF (NYSE: COPX)
Both hold a broad basket of copper-producing companies’ stocks from all over the world. And now happens to be a great time to get into any of them.
With prices down on pessimistic outlooks, the red metal just has that much more to rise.