Loyal subscribers know I often opine that world markets are in the midst of a secular bull market for commodities, or “stuff”, as my recently passed friend Clyde Harrison was so fond of saying. Despite his traitorous penchant for Coors Light (instead of the classic St. Louis-brewed lagers), Clyde was one of those fellow Missourians who always had to be shown, and we all miss his wry wit, sense of humor, and insight into the speculative commodities markets.
You may also be aware of my many writings and interviews on the supply-demand fundamentals of copper, the metal with a “Ph.D. in Economics”. Copper is the one commodity that most directly reflects the near- and mid-term health of the world’s economy.
The modern copper industry started in the early 1900s with advent of large, mechanized open pit mines that could mine lower grades thru economies of scale. Development of these mines was coincident with the demand for and delivery of electricity to the industrialized world. Copper cable and wire is necessary for efficient transmission of electrical power and remains the main use of the metal.
Most of the easily exploited surface deposits of copper were discovered long ago. For many decades now, explorationists have depended on indirect surface geology clues, subsurface geophysics, geochemical sampling, and remote sensing to target and discover new economic deposits of copper that do not crop out. Increased exploration over the past eight years has resulted in discovery of major new resources, but long lead times to development and mining continue to hamper primary supply. The copper market will be “tight” for the foreseeable future.
As geologists and engineers, we simply are not finding, developing, and mining enough copper to meet future projections of 4% growth year over year. The world currently uses about 20 million tonnes of copper a year, mine production is flat at about 16.5 million tonnes, and the growing shortfall is made up by increased recycling of scrap. Most of the increased demand will come from rapidly growing middle classes in the BIIC countries, and this bodes well for the near-, mid-, and long-term price of copper.
With worldwide economic uncertainty and uneasiness, Dr. Copper wasn’t feeling so well during the last half of 2011; he was not really sick but certainly was a bit mixed up and had a lingering case of the blahs.
Despite less than robust supply and demand fundamentals, copper set all-time high price marks in the first half of 2011. I pointed to the dichotomy of rising inventory stocks and prices at the beginning of last year (Mercenary Musing: Jan. 4, 2011), commented that market fundamentals were unhealthy, and boldly predicted a correction (Mercenary Videos: Jan. 5 and Feb. 3, 2011; Mercenary Interview: Jan. 6, 2011).
We indeed saw some momentary dips in the mid-spring and mid-summer that shaved about 15% off an overbought market, but for the most part the red metal train kept rolling along. The much needed and long overdue correction finally came in early September for all resource commodities when fears of the Euro debt crisis resulted in a broad sell-off in all speculative markets. Copper was predictably among the hardest hit with its persistently weak short-term fundamentals:
Since that precipitous four-week fall of nearly 30%, copper bounced off a low of $3.05 twice, hit a high spike of $3.75, and until recently has been range-bound between $3.30 and $3.60. It is showing renewed strength since the first of the year with the latest spot copper close at a five-month high of $3.87.