Peak Copper?

[HenryTo]

Very bullish sentiment now on copper prices - culminating now in an argument for "peak copper."
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The Globe and Mail
Copper the new must-have metal
By ERIC REGULY

Tuesday, December 27, 2005 Page B2

We asked Barrick chairman Peter Munk last spring to name the metal he would buy with his own money. Surprisingly, the answer wasn't gold. "Buy copper," he said. He was right (although gold prices went up, too). Copper prices rose almost 50 per cent this year and have doubled over two years.

Tens of millions of rural Chinese are moving into cities, he said. Their new homes require copper plumbing and wiring, and Chinese mines and smelters can't meet the internal demand. China alone eats up more than a fifth of global copper supplies.

With the price going so high so fast, it's tempting to take some money off the table. But hold on. A new investment theory making the rounds says oil and copper might, distressingly, have a lot in common. You've heard of "peak oil." How about "peak copper?"

The peak oil camp argues that the planet's oil production has reached, or will soon reach, peak production, followed by slow but irreversible decline. The true believers point to oil fields that are becoming less productive, sometimes alarmingly so, and the distinct lack of big new discoveries. In fact, most of the world's oil comes from fields found in the 1970s or before. The peak oil advocates naturally expect prices to go up; to them, $100 (U.S.) a barrel is possible in the not-too-distant future. They invest accordingly.

You wouldn't think copper has much in common with oil, economically speaking.

When I renovated my house last year, the contractor installed plastic pipes instead of copper to save a few bucks. Put plastic in millions of homes, and copper prices, you would think, will come down. "Substitution" does not generally apply to hydrocarbons. I can't save money on my heating and transportation bills by replacing natural gas or gasoline with another fuel of similar price; that other fuel doesn't exist.

But there are no reasonably priced, and equally effective, substitutes for copper when it comes to electrical conductivity. Electrical uses, not plumbing, are the metal's main market. If you want wiring, you get copper unless you're a millionaire and can afford silver. Copper bulls expect the auto makers to drive up copper demand. Hybrid cars, which combine gasoline engines with electric motors, use almost twice as much copper than regular cars. The number of hybrids on the road is doubling every year. Credit Suisse First Boston says copper demand has been rising 4.3 per cent a year on average since 1997 and could go to 5 per cent.

That's the demand side. The supply side isn't keeping up, which brings us to the next parallel to the oil market.

Oil's swing producer is OPEC. In the copper world, OPEC's equivalent is Chile. In the past 15 years, Chile has provided two-thirds of the world's copper supply growth. One of the biggest Chilean mines, Collahuasi, is 44 per cent owned by Toronto's Falconbridge.

The country has been a godsend for China and other voracious copper munchers.

Now the bad news. "Going forward, Chile has fewer options for growth and its seems a lot of the low-hanging fruit has been picked," CSFB said in a recent report.

It added that "based on existing mines, Chilean copper production has plateaued and could decline, from 5.5 million tonnes in 2005 to 4.4 million by 2015, as mines age and copper grades decline." In fact, Chilean copper product fell almost 3 per cent in the first 10 months of 2005.

Sound familiar? Peakists must be delighted to have another allegedly peak commodity to fret about.

But won't the soaring price trigger a copper exploration and production bonanza? There's more bad news. Like oil companies, copper companies are investing more and more to yield less and less. Chile's Codelco, the world's biggest copper producer, invested $4-billion to raise production by a mere 165,000 tonnes a year. That's equivalent to almost $11 a pound of extra capacity. The price of copper was $2.09 a pound just before Christmas.

In spite of the shortages, the overall investment in extra production is, at best, modest. Blame greedy investors and their short-term thinking. They would rather see the high prices fund share buybacks and special dividends instead of risky plays in dubious parts of the world, such as the Democratic Republic of the Congo, one of the last regions thought to have big, untouched copper deposits.

Combine evidently waning Chilean production, a reluctance to throw billions at new projects and relentless Chinese demand and you have a recipe for supply deficits and even higher prices. No surprise metals analysts are raising copper price forecasts by double-digit rates for 2006 and 2007.

This is good news for investors. Falconbridge and Inco (the two are merging) are primarily nickel makers but have a lot of copper production. Toronto's Inmet Mining is another copper-heavy player. Big copper names outside Canada include Phelps Dodge, Southern Copper and KGHM. The new year may bring them riches they could only dream about in the lean 1990s.

ereguly@globeandmail.com

[rffrydr]

A new hard money policy?




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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Good catch and take. The official stocks numbers are therefore conservative - and even those numbers are implying lower prices for copper and other commodities. This reminds me of the high school teacher who were stockpiling gasoline featured on the WSJ last summer.

[rffrydr]

Good luck with the stock numbers. I said there'd be news like this:

http://www.bloomberg.com/apps/news?pid=20601109&sid=a1B_ZBQfii8Q
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

The apparition of "real demand":

http://www.bloomberg.com/apps/news?pid=20601086&sid=adYa7EqkwijU

[rffrydr]

They're back! Commodities cannot withstand a 10% "diversification" from Pension funds. The discrepancy between "Peak" and non-peak....or chinese and non chinese, commodities shows this plainly. Again

http://ftalphaville.ft.com/blog/2009/05/29/56403/funds-piling-back-into-the-commodities-trade/




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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

The correction to the inventory correction well established here. Let's hope that Dr. Copper is back in business:

http://www.bloomberg.com/apps/news?pid=20601110&sid=apYUh4P04CUw
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

The current picture:

http://ftalphaville.ft.com/blog/2009/05/12/55789/the-china-copper-effect/
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

China Minmetals Nonferrous Metals Co said that the Chinese government may stop buying copper because stockpiles are big. Need to see if they will be consumed in the second quarter. Story says that manufactures and bonded warehouses hold significant copper inventories despite the fact that Shanghai exchange stockpiles are low. The story also talks about lower aluminum demand.
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

A bull and closet bull story, CAZ and BNP reports:

Macro news improving
Recovery ‘noise’ is increasing almost daily with most major global economies’ lead indicators showing a reduced rate of decline, although still, in most cases, contraction. China, the exception as we discuss, has been remarkably robust with most major indicators suggesting a bottom was reached in November, from which we have subsequently seen steady MoM improvements. Recent lead indicators in money supply and credit creation, not to mention iron ore and copper imports, point to an economy responding to the aggressive stimulus measures announced in October.
While we do not believe the Western economic recovery will be anything more than anaemic, as and when it starts, there is likely to be some positive restocking effect in the near future.
BE:
Commodity price and earnings forecasts – last of the downgrades
We are adjusting our commodity prices mainly down overall while assuming a modest uptick in prices generally into 2010. The biggest changes since our last note are thermal coal, coking coal, aluminium and rhodium. We had already changed coal assumptions in our models following settlements. Counter-intuitively we have lifted our copper price forecast 13% to $1.70/lb. Iron ore now becomes the biggest ‘call’ in the sector generating 43% of our 2009 forecast EBIT. The changes to 2009 EPS forecasts are in descending order: VED (+241%), FRES (+159%), ANTO (+47%), KAZ (+17%), BLT (2%), RIO and XTA (both 7%), AAL (35%), ENRC (37%) and LMI ( 333%).
BE:
Margins remain healthy particularly for this point in the cycle
The overall margins for the diversifieds have reverted to between 14-33% at the operating profit level– this compares with a range of 10-22% at the last cyclical nadir. The copper pure plays, on our price forecast of $1.70/lb for the year, deliver a margin of 40% vs 41% in 2002. This shows that good quality mining companies will generate substantial cash at the bottom of the cycle – a case for rerating. The companies are not wasting time either in using the current low margin environment to squeeze costs (-18%, 09/0, through the shut down of more marginal production, assisted by weaker domestic currencies.
BE:
Valuations up to speed with fundamentals but should not prevent performance
The equity markets have driven a very powerful beta rally in the sector from admittedly distressed levels. While this has left many of the diversifieds trading on what may appear demanding multiples on spot (15-20x PER in 2009E), arguably this is a reasonable level should 2009 prove a trough year for earnings. Analysis of over 20 years historic PER data suggests that current multiples based on our forecasts suggest a significant probability of positive absolute returns. We note too the heightened sensitivity of the sector: our assumptions see the multiples fall to an average of 11x 2009E and pretty modest price improvements drive through considerable growth
in earnings 2010/2009 (26%). On a stock by stock basis, we find the biggest mismatch between multiple and commodity exposure is Xstrata which looks favourably placed.

[rffrydr]

· Copper inventories on the LME fell 7,300 tons

· China’s Yunnan Copper, third largest smelter in China, forecast a Q1 loss of 261 mln yuan. Blamed reduced output and falling prices.

· China’s copper imports fell 44% in the seven months to March 31st – NDRC. March imports were 99,000 tons down 54% y/y.
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Citi's take:

We have been arguing in our MMM for some time that the low point of the
mining equity cycle has been reached. We initially set out a range within which
we believed the miners would form a base for an uptrend and recently lifted
that expected trading range into a ‘first-stage-platform’ for better things to
come.

In spite of this improved view, we have to be rational about the fact that metal
demand conditions are still extremely poor and that metal inventories have
shown little sign of a sustained downtrend as yet. Because of this, it is
important that investors do not get carried away in unfounded optimism about
the likely pace of the rise in miners.
NH:
Copper has been a key ‘emotional support’ for the sector in the first few
months of the year, at a time when its peer metals have been languishing.
Figure 4 below shows how copper has moved since the start of the year in
relation to its peer base metals. While other base metals are growing steadily
but unspectacularly off their base (which is in keeping with the still-difficult
demand and inventory environment), copper has been roaring ahead as though
the new demand and inventory cycles are well under way.
NH:
The risk in relying too much on the Chinese copper stockpiling is that the
Chinese are also unlikely to be ‘buyers at any price’. It made sense for them to
accumulate the abundantly available excess copper supplies at lower prices,
but at some point they are going to conclude that the Western market has ‘seen
them coming’ and priced up the metal too much too soon.
NH:
We have warned in the past that copper tends to do very well each year in the
period between the Chinese New Year (when seasonal re-stocking typically
starts) and the key annual CESCO copper conference, which takes place in
Chile in April every year. The bold line in Figure 5 above shows the average 3-
month percentage change in the copper price over the first 125 trading days of
each year from 2004 to 2008. The thin red line tracks the 3-month percentage
growth in the copper price during the current year.
Given this seasonality and given that the mining equity market has fed so much
off the sentiment emanating from the superb performance of copper in 2009
(and ignored the sluggish performance of other base metals), the chart above
has implications not only for copper seasonality, but implies that the mining
equities are also due to take a breather in the weeks ahead.
Our optimism on the miners remains. They are supported by the basing-out
process in metals, by non-stretched valuations, and by the generally positive
rub-off in equity markets from a banking equity sector that no longer seems to
be imploding. However, there is a strong possibility that base metal prices will
have to do a lot more ‘groundwork’ near the base of the cycle while we wait for
OECD metal demand to revive and for inventories to at least stop rising. China’s
demand may well steadily improve now, but one must not lose sight of the stilldire
levels of metal demand in the mature economies.
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Scrap rate: nothing is obvious in these obvious times:

http://www.ft.com/cms/s/0/a5897536-2309-11de-9c99-00144feabdc0.html
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

The stockpiling rally getting called out:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=abPKnWczLQvA
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Today is the Tomorrow you worried about Yesterday!

[diesel]

This is a smart play by the Chinese IMO. Why bother with gold when you can buy something actually useful. The Chinese are ahead of the trend... They will be the ones to lead us out of the abyss.
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All cats are gray in the dark.

[rffrydr]

Chinese still buying their "red gold":

http://uk.reuters.com/article/oilRpt/idUKLB29998620090213
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Today is the Tomorrow you worried about Yesterday!