OZL 2.21% $15.05 oz minerals limited

the death of cu has been greatly exaggerated

  1. 1,674 Posts.
    With thanks to noiprocs who posted this on another thread:

    The death of copper has been greatly exaggerated

    Extracted from www.lemetropolecafe.com

    Looking at the 5-yr chart for copper inventory, supplies have been rising recently, but still are only about half of where they were 5 years ago. Contrary to assumptions that we have a glut of metals, the inventory levels are still below long term averages, and well-below the levels that triggered base metals bear markets in previous cycles. The price however is now down by more about 60% from the peak levels that were seen when inventory was at the low. What gives?

    We know the obvious answer that hedge funds and specs were forced to dump metals futures in a rush to liquidity as margin call selling rolled over. One would assume that a significant degree of new shorts have also been put on. Of course a glut of paper metals does not produce a single pound of real metal, and in fact the lower prices triggered by such shorting is sure to guarantee that less production will result. This is also documented by the large number of mine closures and development projects that have been halted recently, with more to come.

    So the supply side never reached bear market gluts, and has since been further constrained by mine closures. What about demand?

    The rapid rise in inventory levels suggests to me that buyers - those who are actually copper consumers for fabrication demand and not the paper spec buyers - abruptly ceased taking copper delivery. Why? The media likes to promote the concept that worldwide growth has slowed due to recession and while that is certainly true, it would not account for the complete collapse in copper demand. The real situation is far more complex. Look at new home construction and auto sales for example. Both were in declines for many months in the United States before the media started talking of recession, and both account for significant copper demand. So the slowdown was already priced in to some extent from declining consumption going back to last year, yet inventories only rose abruptly just within the last few months.

    A more credible explanation is that copper consumers suddenly found themselves unable to arrange credit in order to take delivery of copper, and therefore the copper was not shipped. This is also confirmed by the Baltic Dry Index, which shows shipping rates fell through the floor during the last couple of quarters, as container ships and bulk carriers have been sitting idle in ports with limited traffic.

    So production of copper is constrained, yet supply has risen, and the price for copper is at the lowest level in 4 years. Are we headed higher or lower?

    My expectation is simple. Industrial consumers have been living off their own stockpiles for the last few months and were unable or unwilling to buy copper from world markets. Even if we assume consumption has slowed somewhat due to recessionary forces which is reducing overall demand, demographics would suggest that the slowdown is nowhere near as severe as the inventory buildup would suggest. Things must be approaching a critical shortage at the end-user level.

    With prices of copper falling so much on the spot market, and the world awash in cash needing to find a home, I do think that copper consumers are going to be motivated to rebuild their own copper stockpiles and take advantage of the situation. Low prices have always been the best cure for low prices. It appears that some relief in the credit crisis has been accomplished, and the acute copper shortage for consumers may be a factor to suddenly boost the offtake from metals pools and reduce the inventories at the LME and COMEX.

    The USD has staged an incredible rally of late, which has also driven down the spot price of all commodities as priced in dollars. One would assume the weak domestic economy of the US will eventually take a toll on the value of the dollar, and this in turn will put a nice boost into the spot price for copper, oil, gold, etc.

    The Chinese government announced a stimulus package earlier this month to keep their economy rolling. The benefit for the Chinese is that they actually have a current account surplus and a trade surplus which has built in a huge foreign exchange reserve. They have the dollars in other words, and do not have to create money to implement a stimulus package. The country is probably motivated to be on a spending spree now that the USD is relatively high and commodity prices are low. Expect that in addition to industrial demand for copper going on the uptick, that the capital programs for infrastructure development announced by the Chinese will also create additional drawdowns of copper inventory.

    A final point is that we could see a short squeeze develop again among the specs that misread the copper situation and have gone net short. That would drive copper prices much higher even as real metal inventories start drawing down.

    Put all of the above factors together, and I think we are about to see a violent recovery in the price of copper. Reports of the death for the commodity market are as usual, grossly exagerated. Several profitable copper plays have had their share prices crushed in recent months. The interuption of development for other copper mine projects has just put even greater value on the low cost mines that are still producing today.

    The market has offered up so many great bargains lately and this could be the time to step up and buy the hell out of these oversold copper juniors ahead of a pending upside reversal for copper.

    Like all base metals cycles, this one will eventually end in a period of overinvestment and production glut. We are a long way from there, and worldwide demand will be moderated by the recessionary forces currently at work, but the modest supply will ensure that copper prices are going to recover and stay at very profitable levels for years to come.

    Unless one is prepared to assume that worldwide industrial activity is going to come to a standstill, a recovery for copper is imminent.
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