No secret that commodity prices have plunged on fears that global economic growth is fading. Or in the case of China slowing from near 12% annually to something like 8% or 9%.
And no secret that the prices of commodity stocks have plunged as well. Shares of copper, gold, and molybdenum producer Freeport McMoRan Copper & Gold (FCX) are down almost $30 from their April 5, 2010 high as of the close on July 6. That’s a drop of 33% in three months.
 But commodity producers, especially copper producers, are starting to talk about actual commodity shortages in 2011 because commodity producers are responding to current low prices by slowing expansion plans or putting off opening new production completely.
Commodities ride a wild boom and bust cycle—especially in a world where demand and supply are so closely balanced. Yes, it now looks like 2010 will be a commodity bust year. But that could put commodities and commodity stocks in position for a boom year in 2011.
 For investors, the commodities story may be Wait ‘til next year.
 The commodities futures markets aren’t showing any belief in a 2011 boom. They’re sunk in pessimism. Copper futures on the London Metal Exchange price in a scant 1.2% increase in the price of copper by the end of 2011. (I’m concentrating on copper because recently it’s the metal that has shown the strongest correlation with rising and fall projections of economic growth.)
 But first Goldman Sachs (GS) and more recently copper producers Codelco and Freeport McMoRan have warned about shortages in 2011. Goldman Sachs has projected that copper prices will be 23% above the level predicted by futures prices by the end of 2011.
Both copper producers have pointed to the same problems. Costs in the industry are rising as more and more companies are forced to mine lower quality grades of ore. New finds with higher quality ore were extremely rare before the global economic crisis and the crisis hasn’t done anything to improve the geology of mining. A number of mining companies have recently either lowered their production forecasts or missed production targets completely in the last quarter or two. For example, BHP Billiton (BHP) in April reported that its first quarter production in 2010 had dropped below production in the first quarter of 2009.
 Average ore grades have fallen about 26% (in their concentration of copper) over the last two decades, according to estimates from Deutsche Bank. Australia’s Macquarie Bank calculates that the 2011 shortfall could be the largest since 2004.
 Over the last two decades copper producers have made up for the declining quality of ore by expanding their mining activity. Each truckload of ore may contain less copper per ton, but the companies were filling more trucks.
 But with financing hard to get in the aftermath of the global financial crisis and everybody worried about falling demand, companies haven’t been making the big investments required to expand ore production. Chile’s state-owned copper miner Codelco isn’t shy about making its point: The company needs to see higher copper prices before expanding production.
All this sets up the strong possibility of another supply shortage in 2011 if demand stops falling and actually inches upward. And that’s exactly what Morgan Stanley, for one, is predicting. Copper demand will climb 6.4% in 2011, the company projects.
I think it may still be a little soon to invest in copper stocks. (For some thoughts on timing see my post https://jubakpicks.com/2010/07/05/within-six-months-global-stock-market-performance-will-diverge-where-do-you-want-your-money/ )
 But I wouldn’t wait until 2011 before I started to build positions in those stocks.
this argument would also certainly have to be taken into consideration:
http://finance.yahoo.com/retirement/article/110001/stocks-and-bonds-are-now-hazardous-to-your-wealth?mod=retire-planning
OT:Jim et All,
I have a substantial position in a little Australian healthcare company that fills a niche, TB testing. Keep in mind that 1/3 of ALL people in the world are estimated to be carriers. Furthermore, the rest of the world uses an ancient vaccine of limited effectiveness. (There is no effective vaccine yet though CRXL and others are working on one.) The also ancient TB skin test cannot differentiate between a person having been exposed to TB and a person having had the ancient vaccine, both have positive test results but only 1 needs treatment. (Think foreign university students in the USA.) Cellestis’ QFT test can differentiate between these two, is a one step blood test run with standard lab equipment, has been approved by the W.H.O., and in the past month our CDC has upgraded it’s recommendation of the QFT over the TB skin test in certain situations and equal to the TB skin test in almost all situations. Cellestis has made a profit since 2008, pays a dividend, has no debt and is growing fast. The US has a low incidence of TB at the moment but I once heard that CHINA is estimated to have 400,000 active cases. Full Disclosure: I used to be a public health TB nurse. Trades here and in Australia with tiny volume. Earnings out in August. A high of $4AUD in past year, now $2.80AUD. Reify99 CST.AX/CLLWF.PK
just returned to the States after month trip thruout China. My Take is that apartment construction is slowing down fast. this will then trickle down to the commodities. I agree for now that commodities have nowhere to go.
Jim- I think I remember that huge amount of copper [and other commodities] that the Chinese stockpiled over the last year or so- what became of that? [Why FCX went up to those nose-bleed levels, after faltering badly the year or two previous- badly enough to eliminate their dividend, and then repalce it with a pittance]? But I suppose Goldman and Mother Morgan have factored that in already…
Monika- seems like yer own return this year would be of more interest to you… especially if you sell differently than Jim suggests. Hope you did well!
Monika,
Jim posted 1st Qtr results on June 30, and preliminary 2nd Qtr results on July 1
Hi:
Since Jim does not seem to be able to post the performance of his Jubaks Pick portfolio for the first quarter of this year, let alone for the last quarter, I was wondering whether anyone follows Jims buys and sells exactly on the day he recommends it, and knows what the performance is for the first quarter, it being already July!!
I buy his recommendations, but sell at different times than when he posts a sell order, so my own portfolio looks totally different from his – hence I would like to know his return for this year….
Thank you so much!
I think a shrewd move would be to start dollar cost averaging in Fidleity’s (or any mutual fund) Global Commodity Fund (FFGCX?). Down about 16% y-t-d.
Thanks for this timely piece. I was thinking buying BHP because the super mining tax cloud seems quite cleared.