The next phase of China's economic plan is fueling a relentless appetite for electricity, spiking demand for copper. That has moved investors to drive up the price of the metal, as well as the stocks of companies that mine it.
Copper has risen 14% this year, with contracts traded on the London Metal Exchange tripling since December 2008. The Bloomberg index of world mining stocks this year has climbed 16% to the highest level since Aug. 1, 2008, driven by miners like Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX), and Ivanhoe Mines Ltd. (NYSE: IVN)
Gray predicts the metal could rise by 50% to $12,000 a metric ton in the next six to 12 months.
Copper turned higher in 2003 as the global economy recovered from the 2001 downturn, then slumped in 2008 as the credit crisis kicked in. The metal rebounded in the last days of 2008, and has been on a tear ever since.
The surge in prices has been sparked by a classic supply/demand imbalance, mostly driven by emerging markets - especially China.
China's is on pace to almost triple its copper consumption to 20 million tons by 2020, when it will account for 49% of world copper sales, according to CRU, a London-based mining and metals consulting firm. That's more than the world's total production today.
What's more, rising demand will create a potential global shortage of 11 million tons a year by 2035, CRU forecasts
After the 2008 financial crisis curtailed liquidity, miners pulled back on future mining projects, killing all but two that were scheduled to start by 2016, delaying 3.5 million tons of additional capacity, Gray said. He thinks demand will outstrip supply until at least 2013.
"We are looking at a copper market globally that is going to really struggle to keep up with the demand needs, and, in particular, the demand needs of China," Gayle Berry of Barclays Capital Berry told Bloomberg.
Dr. Copper - The Ultimate Economic Barometer
Copper is primarily used for industrial applications and is usually overlooked as an economic indicator.
But while gold is seen as a store of value and a hedge against a falling dollar, copper is viewed as an uncanny gauge of future global economic activity. Copper's economic sensitivity is so great, in fact, that traders often refer to it as "Dr. Copper."
While gold serves investors as a security blanket against future economic collapse, it has few practical uses other than jewelry. Copper, however is critical to the manufacturing of electronics, homes and infrastructure.
"Copper is not easily replaceable so often end users cannot substitute" for it as they can for other base metals, said Kevin Kerr, editor of Kerr Commodities Watch. "That is one of the elements that makes copper such a good gauge of real value in the industrial metals."
China' Next Phase of Development Moves to Hinterlands
China is the world's second-largest economy, but for its economy to maintain momentum the country must urbanize its mostly rural interior. More than half of China's 1.3 billion people reside in rural areas, mostly farmers and nomadic herders who live off the land.
The per-capita gross domestic product of inland provinces is less than half of that on the coast, according to data from China's National Bureau of Statistics. Overall, the government wants to quadruple per-capita GDP from 2000 to 2020.
"When politicians say China is a developing country, it's true," Wu Jian, director general of the Rio Blanco Copper SA mine in Peru, owned by Fujian province-based Zijin Mining Group Co. told Bloomberg. "It doesn't all look like Shanghai or Beijing."
Accelerating the urbanization of central and western China will push economies there to grow, Vice Premier Li Keqiang said in a speech in February.
"Boosting domestic demand and moving people into cities are priorities to maintain China's fast long-term growth," he said.
Over the next 15 years, the country will need 50,000 skyscrapers, 170 mass transit systems and urban housing for 350 million people, according to a 2009 study by the McKinsey Global Institute. That could double the domestic market for autos, appliances, televisions and other consumer goods.
"There is absolutely torrid growth taking place in central China," Daniel Rosen, a principal of the Rhodium Group, a New York-based economic advisory firm told Bloomberg. "It's going to build an Eastern China over again."
And copper is at the center of it all. The material is one of the best conductors of heat and electricity. The metal first used by man over 10,000 years ago now provides the electrical core of homes, cars, and mobile phones.
It also provides the wires and transformers that move the electricity for all those computers, dishwashers and microwaves China makes for the world and for increasingly robust domestic consumption.
China's consumption of the metal has tripled in a decade to an estimated 6.8 million tons this year, according to CRU. State Grid Corp. of China, the country's largest electricity distributor, will absorb one million tons of copper a year until 2015, according to Qu Yi, CRU's Beijing-based copper analyst.
China Reaches Out for Copper
Building all those skyscrapers and transmission lines means China's appetite for copper will be "relentless," Andrew Harding, chief executive officer of Rio Tinto PLC's (NYSE ADR: RIO) copper unit in Santiago, Chile told Bloomberg.
And China's natural supplies of the metal are dwindling fast.
China "has a relatively poor endowment of metal raw materials relative to its share in global consumption," according to Michael Widmer, a London-based metals strategist for the Merrill Lynch unit of Bank of America Corp. (NYSE: BAC). It will produce just 10% of the world's copper by the end of 2011, according to Widmer
Following the tradition of other great powers, China is reaching beyond its borders for resources as it builds the world's fastest growing economy. China's purchases of copper have poured cash into resource-rich countries like Peru and Chile.
Beijing-based Aluminum Corp. of China (NYSE ADR: ACH) bought the mineral rights in 2007 to a mountain in central Peru called Toromocho, one of the world's richest copper claims.
The $810 million purchase is just one piece of about $5 billion that Chinese companies have spent buying copper mines and deposits around the planet in the past four years.
The acquisitions will yield about 1.6 million tons of annual supply, based on data compiled by Bloomberg. China will easily consume that by the end of 2014 at its present growth rate, according to CRU's forecast.
"They're trying to lock down as much as they can, which no other government seems to be doing," Jeffrey L. Fiedler, a member of the U.S.-China Economic and Security Review Commission in Washington, told Bloomberg. "They seem not to trust the market or don't want to depend on it."
Peru is the world's fastest-growing copper producing country. Exports of iron and copper to China helped it grow its economy by almost 12% through June.
"In 30 or 40 years, this is not going to be the United States' back patio anymore," Victor Miranda, head of communications in the Peruvian ministry of foreign investment told Bloomberg. "It's going to be a projection of China."
Where to Invest in "Red Gold"
Copper prices have almost tripled on the London Metal Exchange since December 2008 despite the global recession, recently trading around $8,200 a metric ton.
BlackRock and JPMorgan have filed plans to raise as much as $1.5 billion to buy and hold the commodity. ETPs, which can be bought and sold like stocks, give investors access to commodities without having to take physical delivery.
Funds that own physical supplies may exacerbate shortages while raising prices "at an accelerated rate," Daniel Brebner, the head of metals research at Deutsche Bank AG (NYSE: DB) told Bloomberg.
If you're thinking about going for a ride on the "red gold" bandwagon there are several avenues open.
Freeport McMoran is the world's biggest copper miner and analysts like its management team and financial fundamentals.
Investing in actual copper is another way to go. You can get exposure through the iPath Dow Jones-UBS Copper ETN (NYSE: JJC) exchange-traded fund, which tracks the price of copper futures on the Comex division of the New York Mercantile Exchange.
But keep in mind that, as with all metals, a position in copper is purely speculative, since it doesn't generate any cash flows. So you'll get a return only if you sell shares after they've appreciated
As is the case with all investments, do your due diligence and err on the side of caution.
News & Related Story Links:
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Copper rallies on strong emerging-market demand
- McKinsey Global Institute:
Preparing for China's Urban Billion
China's Rural Growth Spurs Copper Demand
China Boss in Peru on $50 Billion Peak Bought for $810 Million
- Money Morning:
Dr. Copper's Diagnosis: A Strong Recovery
- Money Morning:
Commodities Are Key as China Continues to Call the Shots