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]

Chinese aluminum shares were down on news that most lost money in the first 11 months of 2005.
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

All reason for 150-170 copper: then there's the HEDGE FUNDS

There: money's been dramatically dropping off with fees raised and money locked in (2years to avoid SEC registration 2006) and returns gone from high 20's in 98 to 4-8% (assuming you can price "returns" on east-europeon realestate or, even, GM bonds. "Backwardized" commodity markets make decent yeild on spread risk--but they've been killed on the grains etc.

*450 new hedge funds last year with 26year-olds at the helm. Remember Nasdaq, 2000???

I'm betting against them but this subject needs more attention. Japan's "tightening" may last years; there's alotta money sloshing around!!!
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

My guess is that copper spot prices have already topped or in the midst of topping. Over the last few months, there were many "obvious factors" why copper prices were rising. e.g.

1) Still booming construction and auto industry in china. Sources tell me that the Shanghai real estate boom is now over.

2) A continuing homebuilding boom in the United States - further exacerbated by a spike in new auto purchases because of customer incentives from GM and Ford. These executives have now gone on record and stated that there will be no more incentives going forward.

3) Declining copper inventories in LME warehouses. However, inventories have exploded over the last three weeks and are now up 30% from the end of 2005: http://www.kitcometals.com/charts/copper_historical_large.html#lmestocks_30days

4) Strikes, threats of strikes, and so forth

5) The rise in molybdenum prices from $16 to $32 a pound during 2005 - causing many copper producers to focus on producing molybdenum instead. However, moly prices have since declined to $23 and European demand has slackened significantly in the last month or so. From January to September 2005, moly exports from China were down 22% year-over-year due to shut-downs but are expected to recover sometime in the next couple of months (I doubt the Chinese can resist not reopening these mines). See the following article for more details:

http://yahoo.reuters.com/financeQuoteCompanyNewsArticle.jhtml?duid=mtfh77423_2006-01-10_22-32-25_n10244155_newsml

6) On top of all this, we now know another reason why copper prices have been rising relentlessly is the fact that both PD and FCX have failed to achieve their production targets.

For copper to rise further from here, we need a similar cofluence of events in 2006. Can this happen? Given our mid-cycle slowdown scenario (significantly slower consumer spending and home purchases), I highly doubt it. Even if the real estate boom in China and the coastal cities continue on, copper prices will most probably remain tame if production targets are met at the major mining companies. Combined with a tightening Fed and a tightening ECB, there is nowhere to go for copper prices except for down.

[rffrydr]

The dirty tail-end of the great SRB short as seen in the scrap market:

http://metalsplace.com/metalsnews/?a=3658

"....there are some crazy prices out there."

[Goodfella]

Henry. Its on yahoo news now. They did call the top in oil when they ran news on peak oil.

What are you're thoughts? my initial thoughts are if this is true, it must be in the best interests of the developed nations to slow down the growth of China and India. We cant all have everything, and the trade imbalances the way they are it will be painfull but easy to achieve.
http://news.yahoo.com/s/space/20060120/sc_space/earthslimitedsupplyofmetalsraisesconcern



I think we are at a top now, given global liquidity is decreasing but
until we can make our own elements alchemy style, its worrying for our children.