Copper's continuous thrust into record high pricing is a result of a number of fundamental market situations that have evolved over the last decade. Few could foresee the dramatic impact China's economic democratization would have on global metals demand. But will it last?
China is largest consumer of copper and is expected to use 3.5 million tonnes this year alone. Of that figure, 1.9 million tonnes will come from Chinese mines and smelters, leaving a 1.6 million tonne shortfall to be compensated for by global copper producers and scrap recycling. (Recycling generally accounts for 12% of global supply.)
Global demand is expected to exceed 20 million tonnes by 2010.
So where, and investor might ask, is the top? When do I get in, and most importantly, when do I get out?
Many analysts predicted coppers surging price on China's demand would be short-lived because China would not be able to sustain the developmental place it had then established. These analysts were wrong, as Chinese infrastructure and housing has continued to increase.
In addition to copper consumers, investment speculators have waded into the fray to increase the upward pressure on copper prices into the future.
Analysts again are predicting a flattening of China's demand going forward. Demand is difficult to predict, because it is predicated by forces whose intentions for the future are unknown. The Chinese government increased the cost of borrowing in an effort to slow down economic growth, but this measure was widely perceived as futile.
BMO Financial Group's Commodity Price Report has this to say:
"With (copper) inventories at critically low levels, demand firming amid healthy global economic growth, and production gains likely limited, the resulting tight market balance should keep prices high, even if volatile, during the rest of the year.
Copper prices increased 8% in July for a monthly average of US$3.49/lb. The primary factor behind the advance was continued concern about supplies in an extremely tight market. Specifically, industrial disputes and production problems at major mines in Chile were key catalysts. Monthly copper prices have more than doubled (113%) over the past year. With inventories at very low levels, demand still strong, the threat of strikes still in the air, and production gains likely limited, prices should remain high and volatile during the next several
months."
Ken Heebner of CGM Funds is also bullish:
"Copper goes into the infrastructure of all developing nations, of which India and China are the most publicized but not the only ones. Copper production hasn't been able to grow fast enough to keep pace with demand. When you look around the world today, the earliest we can see incremental new production coming online is 2009 or 2010."
Supply is much easier to predict, because before copper becomes rods, wires and cable, it must be located in deposits in the ground.
According to the Metals Economics Group, "Worldwide, significant copper discoveries between 1998–2004 have fallen well short of what is needed to replace the copper produced - a total of just 39.9 million mt of copper in reserves and resources has been discovered, while production totaled just about 93.6 mt - although the resources in these deposits have potential for further increases over time."
The USA's Copper Development Association (CDA) estimates that global copper resources are nearly 6 trillion pounds. The CDA also estimates that throughout history only 700 billion pounds of copper have been mined.
But just because there are that many pounds on earth doesn't mean its mineable.
The fastest route to increased global production capacity is through the expansion of throughput at existing mines. This can be accomplished by the introduction of larger processing circuits and increased ore movement systems.
But major producers are constantly plagued by unforeseeable issues around labour.
Chile's Escondida mine, the world's largest, has seen its output halved as a result of a 4 –week old strike (as of the time of this writing). The introduction of replacement workers is not expected to return output to normal, but merely enable the mine to continue producing at 50% capacity. Escondida is owned by BHP Billiton and Rio Tinto the world's two largest miners.
Copper output in Chile, the world's biggest producer, fell 1.4 percent in March from a year earlier. Grupo Mexico SA, the world's seventh-biggest copper producer, shut its La Caridad mine on June 8 because it couldn't end a strike.
The best new source of copper inventory is the junior exploration company. In today's environment, they have the ability both to raise sufficient capital to conduct thorough exploration programs, but they usually have a one or two project attention span that means their understanding of the economics and value of their deposits proceeds more rapidly.
Not only that, but when it comes to capital appreciation, juniors who make discoveries (and more importantly, their investors) are the beneficiaries of exponential share price appreciation.
A case in point would be Norsemont Mining (TSX.V:NOM), featured in Resource World Magazine and on Resourcex Investor in April of 2005 while trading at $0.80. When they started drilling their Constancia project, which they had in a joint venture with London-based Rio Tinto PLC, their share price soared to over $4, providing returns in some cases of over 1,000 %.
So the best way to participate in the copper market is through junior exploration companies. Our favorite at present is Acero-Martin Exploration, who at $0.90, (TSX.V: ASD) is in a similar situation as Norsemont. They will be releasing their 43-101 compliant resource calculation sometime in Q3 2006.
When evaluating junior mining companies in the copper sector, look for economics in their calculations that make them profitable even with copper at $1.20.
James West is the publisher of the Resourcex Family of Investing Websites.
His sites include:
http://www.resourcexinvestor.com
http://www.resourcexgold.com
http://www.resourcexcopper.com
http://www.resourcexuranium.com
http://www.resourcextungsten.com
http://www.resourcexplatinum.com
http://www.reosurcexnickel.com
http://www.resourcexmoly.com
http://www.resourcexdiamonds.com
http://www.reosurcexoilandgas.com
http://www.resourcexmetals.com
http://www.resourcexbiotech.com
http://www.resourcexenergy.com
