Best of the Week
Most Popular
1.UK General Election BBC Exit Polls Forecast Accuracy - Nadeem_Walayat
2.UK General Election 2017 Seats Final Forecast, Labour, Conservative Lib-Dem, SNP - Nadeem_Walayat
3.UK General Election 2017 Forecast: Conservative 358, Labour 212 Seats - Nadeem_Walayat
4.Theresa May to Resign, Fatal Error Was to Believe Worthless Opinion Polls! - Nadeem_Walayat
5.UK House Prices Forecast General Election 2017 Conservative Seats Result - Nadeem_Walayat
6.The Stock Market Crash of 2017 That Never Was But Could it Still Come to Pass? - Sol_Palha
7.[TRADE ALERT] Write This Gold Stock Ticker Down Now - WallStreetNation
8.UK General Election Results Map 2017 vs 2015 vs Opinion Polls - Nadeem_Walayat
9.Orphaned Poisoned Waters,Severe Chronic Water Shortage Imminent - Richard_Mills
10.How The Smart Money Is Playing The Lithium Boom - OilPrice_Com
Last 7 days
Gold Back With A Vengeance As Bitcoin Bubble Bursts - 26th Jun 17
Crude Oil Trade & Nasdaq QQQ Update - 26th Jun 17
Gold and Silver Ongoing Consolidation May End Soon - 25th Jun 17
Dollar May Become “Local Currency of the U.S.” Only - 25th Jun 17
Sheffield Great Flood of 2007, 10 Years On - Unique Timeline of What Happened - 24th Jun 17
US Stock Market Correction Could be Underway - 24th Jun 17
Proof That This Economic Recovery Narrative is False - 24th Jun 17
Best Cash ISA for Soaring Inflation, Kent Reliance Illustrates the Great ISA Rip Off - 24th Jun 17
Gold Summer Doldrums - 23rd Jun 17
Hedgers Net Short the Euro, US Market Rotates; 2 Horsemen Set to Ride? - 23rd Jun 17
Nether Edge By Election Result: Labour Win Sheffield City Council Seat by 132 Votes - 23rd Jun 17
Grenfell Fire: 600 of 4000 Tower Blocks Ticking Time Bomb Death Traps! - 22nd Jun 17
Car Sales About To Go Over The Cliff - 22nd Jun 17
LOG 0.786 support in CRUDE OIL and COCOA - 22nd Jun 17
More Stock Market Fluctuations Along New Record Highs - 22nd Jun 17
Understanding true money, Pound Sterling must make another historic low, Euro and Gold outlook! - 22nd Jun 17
Green Party Could Control Sheffield City Council Balance of Power Local Election 2018 - 22nd Jun 17
Ratio Combo Charts : Hidden Clues to the Gold Market Puzzle - 22nd Jun 17
Steem Hard Forks & Now People Are Making Even More Money On Blockchain Steemit - 22nd Jun 17
4 Steps for Comparing Binary Options Providers - 22nd Jun 17
Nether Edge & Sharrow By-Election, Will Labour Lose Safe Council Seat, Sheffield? - 21st Jun 17
Stock Market SPX Making New Lows - 21st Jun 17
Your Future Wealth Depends on what You Decide to Keep and Invest in Now - 21st Jun 17
Either Bitcoin Will Fail OR Bitcoin Is A Government Invention Meant To Enslave... - 21st Jun 17
Strength in Gold and Silver Mining Stocks and Its Implications - 21st Jun 17
Inflation is No Longer in Stealth Mode - 21st Jun 17
CRUDE OIL UPDATE- “0.30 risk is cheap for changing implication!” - 20th Jun 17
Crude Oil Verifies Price Breakdown – Or Is It Something More? - 20th Jun 17
Trump Backs ISIS As He Pushes US Onto Brink of World War III With Russia - 20th Jun 17
Most Popular Auto Trading Tools for trading with Stock Markets - 20th Jun 17
GDXJ Gold Stocks Massacre: The Aftermath - 20th Jun 17
Why Walkers Crisps Pay Packet Promotion is RUBBISH! - 20th Jun 17

Market Oracle FREE Newsletter

The MRI 3D Report

Copper Long-Term Bull Market - 2

Commodities / Metals & Mining Jun 01, 2007 - 02:09 PM GMT

By: Zeal_LLC

Commodities

Scott Wright writes : Five years into its amazing bull market, the king of the base metals continues to hold strong through a renewed onslaught of adversity. After an exciting 2006 that saw copper shatter all-time highs, this red metal continues to trade at levels that most thought improbable several years ago.

Copper's success has given it quality time in the spotlight which has ultimately garnered it increasing mainstream attention. Even on CNBC when headline metals quotes are periodically displayed, copper now shares real estate with gold and silver. But is the fame and fortune that copper had thrust upon it sustainable?


It is first important to get back to the basics and analyze the drivers that brought copper to this point. And as usual, market prices ultimately react to simple economic fundamentals. Fundamentals and prices feed off each other to create a balance. Simply put, supply and demand dictate the markets. But if one side has prevailing strength over the other, prices can trend sharply to reflect such realities in order to reacquire this balance.

Unlike the precious metals with their monetary attributes that give them an extra leg to run on in their own bull markets, the base metals bulls are typically guided solely by underlying economic cycles. And copper falls in this group as a metal thats momentum is being guided by an active global economy.

With a strong global economy in recent years the price of copper has been run up as increasing demand has chased after a less resilient supply stream. With an imbalance presenting itself to the markets, and those demanding copper remaining steadfast in their desire for the metal, prices only had one place to go, up.

Now throughout history the economic balance for any commodity constantly shifts. And this isn't the first time there has been a supply pinch for copper. But in looking at this long-term copper chart, it is obvious that there has been a structural shift in the dynamics of this metal.

In the last several decades copper has bounced between about $0.50 per pound on the low end and $1.50 on the high end. But in its current bull that began in 2003 off the long-term support of its quasi-flat trend over the last 30+ years, copper powered through the $1.50 mark like a jet through the clouds, with no resistance at all.

After so many years in this range, what on earth could prompt such a massive breakout to the upside? I believe the ultimate driver for the push that more than doubled copper's all-time high of the late 1980s in just the last two years is fundamentals.

These fundamentals are largely the result of an economic cycle that has greatly increased the demand for base metals. And this cycle is unlike anything we have ever seen in history. A new variable has been added to the structure of the modern global economy. And this variable is Asia .

Asia , led by China and India , has a population of nearly 4 billion people, over 60% of the global population. But throughout history the economies of these long-repressed nations have had little impact on the global commodities markets. These once-closed economies now vie for the commodities that have modernized most of the rest of the world.

Asia is going through an upgrade of sorts in which its people, who have more money and disposable income than ever before, are starting to demand what the Western world has taken for granted for so long. In China cities are growing like mad as open commerce and upgraded technology enables the populace to make greater economic contributions.

And China is a country where up until recently less than 1% of the population owned automobiles and modern housing was only a dream. Since cars and other modern amenities are now becoming available to a greater percentage of the people, the 50 and 400 pounds of copper it takes to build a car and standard single-family residence respectively can really accelerate the demand for this commodity.

And in a growth economy cars and houses are only a fraction of the copper that will be required in an infrastructure build-out of major cities and ports. Industrial machinery, office buildings, mass-transportation equipment, electronics and general consumer goods will all demand significant copper.

With the demand for copper greatly increasing over the years, the producers have really had to step up their production. Copper mining accounts for about 2/3rds of annual copper consumption with recycling picking up the balance. And though there were lulls in exploration and discovery during the bear-market-low prices of the 1980s and the several years on both sides of the turn of the century, mined production has continued to rise over time.

In fact, according to data from the US Geological Survey, the global mined production of copper is up over 70% since 1990. Nearly every year in this span has seen a rise in production volume over the previous year. And according to the International Copper Study Group (ICSG), world mined copper production is expected to rise by 6.3% this year over last.

In taking an isolated look at the supply growth of copper brought to market each year, things don't look too bad right? Well market pricing could not care less what supply is doing in isolation. Market pricing only cares how supply is doing relative to demand. So since prices have been going ballistic lately, it is apparent that rising supply has still been pinched to meet very strong copper demand.

And this has been evident as measured by the dwindling global stockpile levels in recent years. A couple of months ago I wrote about base metals stockpiles as measured by the London Metal Exchange (LME), the world's largest non-ferrous metals exchange. Analyzing stockpile levels sure provides excellent insight into this copper bull.

From its recent 2002 high near 1 million metric tons, LME copper stock had dwindled to less than 100,000 metric tons last year and currently resides under 200,000. It makes sense that an 80% drop in stockpiles would have a sizeable impact on copper's price. Falling copper supply naturally raises prices for those competing for it.

So with major commodity exchange and government copper stockpiles all dipping to historic lows, sometimes measuring only a matter of days' worth of global consumption, I believe speculators have built a risk premium into the price of copper.

This risk premium is in place because any supply disruption would have a major impact on the markets. When geopolitical uncertainty happens in this industry, market mavens pay close attention. For example, when labor problems came to surface at the massive Grasberg mine in Indonesia earlier this year, the markets were on edge. And when anything labor related occurs in Chilean copper mines, the markets sweat in their boots. Chile only produces about a third of the global mined supply of copper.

This next chart zooms in on copper's current bull market. As the global copper shortage was exposed to the broader markets and LME inventories remained in the sub-100,000 metric-ton level, 2005 saw copper jump above $2.00 per pound for the first time ever and it has not retreated back to this level since.

Following this surge over $2.00, the first half of 2006 saw copper again tear skywards as speculators got a bit euphoric. An amazingly powerful parabolic surge shot copper above $4.00. Even the most fanatical fundamental cheerleaders got a bit worried, and of course the skeptics jumped on board and began to present their doomsday scenarios claiming that copper was in for a crash and that its bull was over.

Though I believe copper's bull is of the secular sort that should last for another decade or so, it was odd to see such a well-defined parabola this early in a secular bull market. Parabolas usually only happen toward the end of bull markets once the general public jumps onboard a trend and bids a price to its glorious pinnacle before an imminent crash that typically leads into a bear market. We are not at this point yet.

So I thought it would certainly be interesting to see how this parabola played out to the downside. Well much to my delight, confirming copper's continuing fundamental strength, its correction wasn't as bad as many had predicted. After an initial 24% correction in just 15 trading days off its May high, copper consolidated sideways in the form of a wedge that remained on the high side of the steep parabola.

With copper still above the $3.00 range, Q4 and the first couple months of this year saw fundamentals turn against it. Copper eventually broke its wedge to the downside as LME stock levels embarked on a sharp rise that doubled warehoused copper stock. Because of this inventory build a chunk of the risk premium I highlighted earlier was subsequently lopped off which saw copper retreat down to the $2.50 level.

After 41% was shed from the top of the parabola, fundamentals yet again guided the price of copper to the upside as big inventory draws gave boost to a recent 57% rally. With copper now down a bit off its highs over the last month, it will certainly be interesting to see what kind of a trading pattern emerges at these still historically high levels and how fundamentals will continue to guide it.

And I expect stockpile levels will continue to have an impactful and real-time influence on price levels. Not many assets or even commodities have such measurable fundamentals as copper and the other major base metals. With above-ground stockpiles still historically low, this risk premium will flow and ebb as demand swings the stockpile levels.

And the strong demand that has the biggest influence on the copper markets comes from the Asian consumers, in particular China . In 2006 China was responsible for about 20% of global copper consumption. So when China 's demand for copper hungers or satiates, the markets react.

Interestingly a big reason for the LME inventory build toward the end of last year and into the beginning of this year can be linked to China 's action in the copper market. In Q4 China supposedly embarked on a de-stocking mission in which government and public copper stockpiles were drawn down without equivalent replenishment.

Without China commanding its usual large copper imports, global stockpiles built up and prices went down. Well eventually China would need to replenish its copper stocks. And we can deduce that this began to happen in Q1 as global stockpiles dropped and prices rose. This was made apparent as revealed in an Interfax-China article that identified the Customs General Administrations' recent report showing that Chinese copper imports for the first four months of this year increased by 130% over the same period last year.

China 's copper activity can certainly make an impact on the global copper markets. And its continued double-digit economic growth will keep it a major player well into the future as it industrializes and modernizes its massive nation. But though China is a big piece of the pie, we still need to keep an eye on how the rest of the world factors in to the fundamental side of the copper trade.

Many other emerging economies have and will demand a lot of copper now and in the future. And I believe supply will continue to be tight for many years which may lead to an acceptably high copper price going forward. But a recently-released ICSG report that provides 2007 and 2008 forecasts throws some interesting twists into the near-term future of copper that has the bears dancing in the streets.

After three years running of refined copper deficits, the ICSG reported that 2006 actually ended with a copper-market surplus. It also issued projections for 2007 and 2008 that hinted at further surpluses. As part of its calculated data, the ICSG reported flat mined copper production last year due to various global production problems and projects 2007 and 2008 mined production to increase by approximately 6% and 7% respectively.

Now at first look this information does not appear to be very bullish. But now we must revert back to China . One factor to keep in mind is that the ICSG does not take into account any changes in China 's State Reserves Bureau (SRB) stocks. Since SRB stock information is unreported, the ICSG cannot include its purported activities in its official calculations.

The ICSG is indeed a respected intergovernmental consortium of copper experts, and the information it provides is valuable and influential. But it is important to view its projections objectively. The copper surplus that the ICSG projected last year combined with the surpluses it is projecting over the next couple years amounts to about 1 million metric tons. This is a trivial amount over this time horizon as SRB stock fluctuations and implied usage alone could easily wipe away and even turn these figures to the negative.

It is understandable why the ICSG cannot estimate estimates that China will not provide, but it is important to attempt to factor in different variables to gather a strategic picture of the tight copper markets. Unfortunately many of the copper scoffers use this headline information to credit their stances without further investigation. But even with the very conservative projections that the ICSG reports, to me it is still quite apparent that an economic balance is far from a reality for copper.

Going forward it will still be key to watch the actions of the world's largest copper consumer. Various experts project Chinese copper demand to continue to grow in the 5% to 10% range for many years into the future. The ICSG projects global refined copper usage to increase by 4.7% this year and 3.6% in 2008. And I suspect that any decline in usage by any of the Western nations, most notably the US , will be more than made up for by Asian growth.

On the mining side of things the producers that are bringing this metal to market have certainly been ramping up their efforts to try to meet demand. This is seen by the mine production growth over the last couple decades as well as ICSG's forecasts going forward.

But like any other finite resource that is extracted from the earth, copper mining is very expensive and comes with extensive lead times to open up new mines. In order to tap the earth's extensive copper reserves, exploration, permitting, development and construction all need to flow through a mining plan before a deposit can deliver its metal to the market.

This process can take up to a decade from beginning to end. Fortunately with the high copper prices today, many of the existing mines have picked up the slack and have cranked up their capacity. Unfortunately this does not speed up the long process of bringing promising new ore deposits to life.

In reality the incumbent mines that have been producing copper for many years are running out of this metal. The bear market years where little time or capital was put into exploration are now coming back to haunt the mining companies.

Thankfully with this bull maturing a number of fresh new deposits have been identified and developed and are moving through the mining pipeline so they may eventually replace the older mines. It's just going to take time for this pipeline to turn over, which is why commodities cycles are quite extensive.

Overall I do not see the copper market becoming any less volatile in the near future. The China factor, geopolitics, speculative excitement and a number of other factors will likely contribute to wild swings in the price of copper. And regardless of this volatility, I believe these high copper prices are here to stay.

Those that are playing the futures markets should perform quite well in this copper bull, but I believe the easiest way for investors to capitalize on copper's gains is through the mining companies that bring it to market. Many copper miners are leveraged to profit on each cent copper rises assuming they can control their costs.

And copper miners are not the only miners profiting on copper in today's environment. Many other metals producers that have copper within the ore of the primary mineral they mine are also profiting. A number of the best-performing gold stocks have strong copper byproducts that have really boosted their profits. These hybrid miners are able to credit their excellent byproduct revenues to the cost of their primary metal and obtain excellent profit margins.

At Zeal we have been recommending copper and hybrid mining stocks to our newsletter subscribers since the beginning of this bull market and have realized some fantastic gains. We are very bullish on the future of base metals, especially copper, and when the markets are technically favorable we will continue to recommend these stocks to our subscribers. If you would like cutting-edge commodities market analysis and high-probability-for-success stock picks please subscribe today .

The bottom line is copper's fundamentals still remain strong. Supply is barely able to keep up with demand and the Asia factor continues to be the cornerstone of this secular bull market.

There will always be those folks calling for an end to this copper bull, but the fact is the global economy is radically changing. Copper and all the base metals are an integral part of these radical changes. It will take many years for demand to subside significantly. The metal and the miners that bring it to market should greatly prosper as this bull runs its course.

By Scott Wright

So how can you profit from this information? We publish an acclaimed monthly newsletter, Zeal Intelligence , that details exactly what we are doing in terms of actual stock and options trading based on all the lessons we have learned in our market research. Please consider joining us each month for tactical trading details and more in our premium Zeal Intelligence service at … www.zealllc.com/subscribe.htm

Questions for Adam? I would be more than happy to address them through my private consulting business. Please visit www.zealllc.com/adam.htm for more information.

Thoughts, comments, or flames? Fire away at zelotes@zealllc.com . Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I will read all messages though and really appreciate your feedback!

Copyright 2000 - 2007 Zeal Research ( www.ZealLLC.com )


© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife