Investing in Copper: Strong global demand will spell 50% gains in copper prices in 2008

Posted February 22, 2008

By Andrew Mickey Founder, Small-Cap Commodity Prospector

Baltimore — (TFN): Investing in copper has been a roller coaster ride for most investors. Part of this volatility was due to intense fluctuation on the speculative demand side: After all, half of all this commodity is consumed in the world is used in building construction. The rest of the world’s consumption of this essential metal is used in electronics production, transportation equipment and industrial equipment.

In fact, it’s pretty much in everything.

Over the past five years, we only seen copper prices rise from rock-bottom lows of 80 cents per pound all the way up to highs a little above $4 a pound.

Granted, a 400% upswing is nothing to get worried about, but it’s nothing compared to what we’ve seen in oil, nickel, uranium, and a few other commodities. Copper normally just gets overlooked by investors on their way to the commodity flavor-of-the-month (i.e. wheat, uranium, etc.).

But thanks to a series of events, copper is set to be the next hot commodity for 2008.

* Global economic growth is continuing to propel demand.
* New copper production is not coming online as expected.
* Current production is not meeting expected targets
* Cost overruns are shutting down the largest next generation copper projects

Oddly enough, Freeport McMoran (FCX:NYSE), the unchallenged king of copper, isn’t in too much of a rush to do anything about it.

Investing in Copper: Copper up, econom — strong?

Copper prices have been moving right in step with the global economy for decades. Forbes even goes as far as saying, “Copper has a Ph.D. in Economics.”

So, what is Dr. Copper telling us about where the global economy is headed?

In absolutely no uncertain terms, it’s telling us the global economy is going to continue its torrid growth rate. The global economy is going to continue to rage on, we should be welcoming a U.S. recession with open arms, and there is one quick and easy way to profit from it all…copper.

Copper will continue to see increased demand as the global economy continues on its torrid growth.

Investing in Copper: Global Decoupling is a Fact

The old adage, “when the U.S. economy sneezes, the rest of the world gets a cold” couldn’t be more wrong.

However, with a U.S. economy slowing and headed for a soft landing or…worse, many investors are starting to raise questions about China’s economic sustainability. But any economic downturn in the U.S. will simply be absorbed by China’s economy. Here’s why.

China is not as highly dependent on exports, as most of the world believes. A recent report by Credit Suisse reports, “at just under 10% of GDP China is slightly more exposed to exports than, say, Japan or India.”

And with China’s economy growing at more than 9% in total per year, which it has averaged since 1979, any downturn in U.S. consumption of Chinese manufactured goods will be easily absorbed.

Just look at the latest export numbers from China. In January, China's exports grew 26.7% from a year earlier. And that increase was booked while the U.S. economy was teetering on the brink of recession. Clearly, there’s some life in the booming Chinese economy and that’s going to mean further increased demand for copper.

Investing in Copper: Supply and Demand, the Invisible Hand at Work

It always comes down to supply and demand in the commodities world…over the long-term. And that’s why copper is looking even more attractive right now.

Over the past 60 years, copper demand has grown from three million tons to 18 million tons. That’s average demand growth of about 3.5% over 60 years. Sure, there have been ups and downs, but demand for copper isn’t going away anytime soon.

In fact, China Nonferrous Metals Industry Association (CNMIA) foresees, “China's apparent copper consumption will climb 9% this year, and 8% next year.” Considering China is far and away the world’s largest consumer of copper, we can expect copper demand to grow another five to six percent again this year.

Sure, that level of demand growth is nothing new to the world economy, but it’s only half the story. The big problem with copper is on the supply side of the equation.

The U.S. Geological Survey notes, “Global [copper] mine production fell short of expectations owing to production problems in Indonesia, Chile, and the United States, as well as labor disruptions in Chile and Mexico.”

Aside from current mining operations not meeting expectations, expected future supply is not doing as well as expected either.

Jochen Tilk, Inmet Mining (IMN:TSX) president and COO, says, “There are not a lot of large copper projects right now that are expected to be in production in the next five years … so from that perspective, we tend to believe that the impact of the lack of projects going forward should fare well for a strong long-term copper price.”

Given all this, it’d be easy to expect copper prices to continue to rise. Since rebounding from a January low of around $3, copper prices are now set to climb past $4 on their way to $5 a pound. If things get bad enough, and there’s definitely that kind of potential with this situation, copper could reach as high as $6 per pound by 2009.

Investing in Copper: The Next Big Find

As you can imagine, there are quite a few companies chasing the emerging copper bull. You have the big boys, like Freeport McMoran, BHP Billiton, Rio Tinto and the like. All with multi-billion market caps and stock prices between $70 and $500 per share. As usual, not much upside on the large-cap side of the copper production game.

China, through quasi-state aluminum company Chinalco, has been buying up as many copper companies as it can get its hands on. Chinalco though, is also the leading aluminum producer in China giving it limited exposure to rising copper prices.

The third, yet most profitable sector with a high exposure to copper prices, is the junior mining and exploration sector. There are two ways to profit from this situation. First, the junior mining companies with the largest reserves will be highly leveraged to copper prices. Second, the junior mining stocks that are in the development stage and taken a beating thanks to rising capital costs, are very attractive buys right now.

There are plenty of gains to be had in copper in 2008.

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