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Copper Prices: How to play base metals in the coming recession

Posted February 24, 2008

‘Who are going to be the next major producers of copper? Chile and other major producers are starting to decline. China just bought two major copper mining companies in Peru and have spent more than $2 billion on a copper project in Kazakhstan.’ – Andrew Mickey

Baltimore – (TFN): The following was taken from the transcript of this week’s TFN Smart Trading Action Alert video featuring J. Christoph Amberger. Watch this video.

Laura Cadden: Expectations of a recession in the United States have triggered considerable turmoil in the world equity markets. Gold, petroleum and other resources continue to trade at or near record price levels. But historically, base metals tend to fall in recessions. Can the commodity super cycle continue as the U.S. economy, still the world’s largest consumer market, reduces consumption and demand?  More important, how can traders and investors continue to make profits, especially in face metals.

I’ve invited Andrew Mickey, editor of Small-Cap Commodity Prospector to help us explore the opportunities in this market. So tell me, what do you make of the recent moves in this market, particularly in copper?

Andrew Mickey: Well, copper right now is showing us the global economy is going strong. Regardless of what happens here in the U.S., we’re seeing copper prices rise. Just last week it hit $3.70, and that’s up 20 percent in about the past two months. Copper prices are going up along with the global economy. Demand is not falling.

Laura Cadden: With this possible oncoming U.S recession, where there would be weaker construction and electronics goods demand, some analysts fear there is going to be a drop. You don’t perceive that happening? Where do you see copper trading in the next two years?

Andrew Mickey: Well, right now copper is in the $3.70 to $3.80 per pound range, and we could easily go to $5.00 and $5.50; maybe even has high as $6.00. And the reason is because the global economy is decoupling from the United States. China, the world’s No. 1 consumer of copper, it’s economy is semi-dependent on the United States though we hear all these statements about how China’s exports are dependent upon the United States. 

And China’s exports are, in a way — because more than half of China’s exports go to the United States. However, we’ve got to consider that only 10 percent of the Chinese economy is based on exports. So essentially on 5 percent of the entire Chinese economy is based on exports to the U.S. And 5 percent, if that market falls a bit, well, there will be some growing pains, but in the long run, China’s 11 percent economic growth rate will be more than enough to offset it.

Tired of reading? Watch the financial video.

Laura Cadden: Yet, the WTO has just given the lowest prediction in years for China’s growth. Do you still think it’s going to be strong enough?

Andrew Mickey: Even so, the WTO numbers estimate China will be growing at 7 or 8 percent per year; still more than enough too offset that decline in exports. That’s why we’re seeing copper start to rebound due to China’s continued demand. We’re actually seeing this decoupling happen now.

Laura Cadden: So about copperl, the supplies are quite tight, is that correct? 

Andrew Mickey: Well, exactly, and that’s why we look over at the London Metal’s Exchange and see actually how much supplies are available right now for consumers like China who want copper today. And right now, supplies have fallen to the lowest point in four months, and we only have three days worth of copper supply. That’s why we’re seeing a big uptrend in copper.

With copper supplies that tight, which we really haven’t seen since copper made its last 100 percent upward move, that’s why we could see another 75 or 100 percent upward move in copper prices again. It’s all the very tight supplies and the demand.

Laura Cadden: Not to mention if there was any labor dispute or any other kind of bottleneck, that’ll increase the price, of course.

Andrew Mickey: Well, there are always little labor disputes – especially in the DRC or the Democratic Republic of Congo. However, the biggest thing that’s affecting the copper market over the next four or five years is CapEx costs, capital expenditures. And that’s the amount of money it costs to actually put a mine into production.

You see, you have to develop an entire resource base. We have 10 million pounds of copper in the ground. To develop that, you need to be able to build a mill, a tailings pond and all kinds of other facilities to actually turn that giant mountain of copper into a mine. And that’s where CapEx costs come in.

Lately we’ve been seeing 100 percent increases in CapEx costs, from $1.5 billion to $3 billion in a lot of instances, and that’s just cutting a lot of projects. They’re just getting pushed off the wayside.

Laura Cadden: Now, the last time you were on our show you had just visited Albania, and you had a recommendation from there that you were looking into. How did everything go with that?

Andrew Mickey: Well, that’s correct. Right when we started seeing copper prices falling, we knew that was the time to start looking where the next big copper find is going to be. Who are going to be the next major producers? As we see Chile start to decline and other major producers, and we see China just bought two major copper mining companies in Peru. China also went and spent more than $2 billion on a copper project in Kazakhstan.

So we know all of these kind of countries that were kind of frontier countries before are now really getting that viability. And that’s why I went to Albania to check out this one property where they actually have extremely high-grade copper. And it’s kind of a mineable deposit, even in high copper prices and low copper prices. So it’s got low risk side, but it’s also got massive upside due to those very high-grade coppers.

Since it IPO’d a couple of months ago, it’s up about 500 percent, and we’ve been doing very well with it.

Laura Cadden: Now, I also understand you prepared a special research report that I can post on our website, kind of about the copper mines and what’s happening with that.

Andrew Mickey: That’s correct. We did a full report because copper truly is the next hot metal. We saw with nickel a little while, cadmium took off, cobalt. Every kind of metal has their time in the sun, and right now, copper, we’re at the very early stage. The next two, three, six months, a lot of money is going to be made in copper. In that report, we explain why, what’s going on and where to look for the biggest gains in copper.

Laura Cadden: So… copper is king.

Andrew Mickey: For the next six months or so it is.

Andrew Micket is editor of both Small Cap Commodity Prospector and BreakAway Investor.

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