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Copper: A Base Metal Becomes More Precious
It’s no secret that gold has been a highly sought-after precious metal throughout much of human history, not just for its ornamental appeal, but also for its intrinsic value. Of all the metals, it is the most malleable and ductile, and has lots of other qualities that give it appeal. Yet, despite that, gold is seldom used for industrial purposes. For the most part, it is used as jewelry and for investment. Many have looked to gold as a hedge, or a safe haven, against inflation and economic volatility. The metal has steadily gained value in recent years, making it even more alluring, albeit unattainable for some. But with copper demand (and prices) soaring, the red metal has grown increasingly popular among investors.
Copper pretty much has been around since civilization began and is arguably one of the most widely used metals. Known for its versatility, the metal has many positive characteristics that make it an excellent material for myriad applications, including industrial production, construction, power generation, and electronic (and semiconductor) manufacturing. It is used to make such products as wiring, plumbing, automobiles, and telecommunications systems, to name a few. The metal is highly malleable, resistant to corrosion, and conducts heat and electricity very efficiently. Additionally, it can be combined with other metals to make alloys used in certain products, not to mention that it is easily recycled and reused without any compromise to its chemical or physical properties, making it a fairly practical material. Lady Liberty and the U.S. penny are among the most prominent objects containing copper.
As with any commodity, it’s important to consider copper’s supply and demand dynamics as well as its price, before including it in a portfolio. Copper deposits—which are discovered, mined, and then “smelted”, or extracted and refined from the ore—are found rather abundantly around the globe, especially in the Andes Mountain region of South America. The mining process is lengthy, though, and takes many years to complete. Until 2000, the United States was the largest producer (supplier) of copper in the world. Since then, however, Chile has surged to the top spot. The South American country is expected to produce upwards of 5.8 million metric tons of copper in 2011, representing about 32% of total worldwide production, according to Cochilco (Chile’s Copper Commission). And production of the red metal there is expected to rise further next year. Interestingly, China recently became the runner-up in copper production, with the U.S. slipping to third place.
On the demand side, China takes the lead. Cochilco estimates demand for the red metal by the Asian behemoth will be close to eight million tons in 2011, or roughly 40% of worldwide consumption. The enormous demand in China is not surprising, however, given that country’s booming economy. Copper consumption is also high in India—another emerging country. (Prior to 2002, the U.S. was the leading copper user.) Consumption of the resource is likely to remain generally elevated in China, as it ramps up industrial production, and develops and modernizes its infrastructure. The problem is that global demand is expected to outrun supply this year and next, and replenishing inventory will, no doubt, take time.
Naturally, the rise in copper demand and tight inventory has led to higher prices for the metal. Indeed, copper prices have been climbing in recent years, hitting a record in February, 2011. Minus the hiccup in 2008 caused by the recession, the price per pound (on futures contracts) has jumped threefold since 2005, from $1.50 to more than $4.60, while the price per ton has surged to $10,000 from about $3,500 during the same time frame. Observers often look to the price of this commodity to gain some perspective on the state of the economy. In fact, it is typically known as “Dr. Copper” because it serves as a leading indicator of economic activity. An upward movement in copper prices usually implies strong industrial demand and ongoing growth in the broader economy, whereas a downward movement suggests weakening industrial demand, and thus signals an economic slowdown. It’s not hard to see, therefore, that soaring copper prices in the last couple of years have reflected a pickup in industrial production with the broader global recovery, driven largely by rapid growth in Asia.
Following the recent quake/tsunami/nuclear disasters in Japan, the price of the red metal retreated a bit, on fears that the catastrophes could cripple the Japanese economy and have an adverse effect on global markets. But the decline is likely a knee-jerk reaction, and the price should bounce back. While the price of the resource is off its peak, reached earlier in the year, it still seems to be going fairly strong, trading well above historical levels. On this end, there is speculation that efforts to rebuild the disaster-stricken region will actually cause copper demand (and prices) to spike. A need to replenish the depleted supply of the resource further supports the argument for a likely rise in copper prices. On the flip side, China has been easiing its imports of the metal recently, which makes the case for a weaker copper-price outlook.
At this juncture, it’s difficult to say with certainty where copper prices will go next, though considering Japan’s rebuilding efforts, up is possible. Copper may well outpace gold and remain a hot metal, at least for the coming two years or so. Investors can get exposure to the red metal through exchange traded funds (ETFs), but also have a number of mining stocks from which to choose, including Southern Copper (SCCO). The Arizona-based company is more of a pure-play, as its mining operations are largely focused on copper. Growth prospects for Southern are particularly bright, driven largely by China’s insatiable appetite for the resource. The miner has projects under way in Peru and Mexico that should help increase its annual copper output capacity by several hundred thousand tons, and benefit profits in the long run.
For more diversified metals miners, investors might want to check out Australian mega mining company BHP Billiton Ltd. ADR (BHP), Louisiana-based Freeport McMoRan Copper & Gold (FCX), and Teck Resources Limited (TCKB.TO) of Canada. In each case, copper represents a sizable portion of business, with increases in output capacity likely in 2011. Hearty profit gains appear to be in store for these miners this year, assuming commodity prices remain attractive. Although the equities are trading near their all-time highs, those willing to bet that metals prices will rise further in the coming months may want to take a look if there is a pullback.
At the time of this writing, the author did not have any positions in any of the companies mentioned.