Copper, that other shiny golden metal, is just as hot as gold right now. And I think the fundamentals for copper are better. After an extraordinary run, Copper pulled back a bit yesterday.  If I see a few days of profit taking, I’d look to buy copper stocks.
Which ones?
On any weakness Freeport McMoRan Copper & Gold (FCX), Southern Copper (SCCO) or Taseko Mines (TGB).
All these stocks have been extremely strong lately and I expect that strength to reassert itself after any dip. Â Freeport McMoRan, for example, was up 29% from the low on August 25 through the close on September 29. Taseko Mines was up 29% during the same period. Even the laggard of the group, Southern Copper, was up 25%.
Some of these gains I’d mark down to the commodity traders. Hedge funds have moved almost as heavily into copper as they have into gold. Demand for copper as a bet on global economic growth and as a hedge against currency chaos has helped drive the price of copper on the London Metal Exchange to $8,045 a metric ton at the close of trading on September 29. That’s roughly a tripling in price since the start of 2009.
From this perspective copper at the moment is like gold–a bet on the macroeconomic future. With copper the bet is on continued declines in the dollar and an increase in demand from the global economy, in particular China.
Right now it looks to observers of the copper market that Chinese companies are running down their inventories in an effort to postpone buying at currently high prices. Chinese companies, London copper traders say, have enough inventory to get them through the end of the year before they have to begin buying again.
It’s on the supply side, though, that copper is different and a fundamentally better story, in my opinion, than gold.
Production at older copper mines—those opened in the 1980s– is declining as miners dig their way through the richest ore bodies and begin to work lower grade ores. That means a company has to move and smelt more rock to get out the same amount of copper. That, of course, is more expensive, but at some mines it’s also not just possible. If a smelter has a capacity of 100 tons, that’s all the rock a miner can run through the smelter, no matter what the grade of the ore. With lower grades of ore containing less copper per ton of rock, production of copper falls.
Output from the world’s top four publicly traded copper producers declined by 12% in the first half of 2010.
Increasing production isn’t quite as simple as it sounds—even if you think that creating new mines in increasingly remote and weather-challenged locations doesn’t sound particularly easy. Not only does a company need to find a new deposit of copper, but getting the copper in that deposit has to be economically viable (we’re talking about building railroads and ports, for example), the ore has to be a higher grade than in existing older mines, and the political situation has to at least offer the mining company the ability to delude itself into believing that it stands a good chance of actually owning the concession by the time copper production starts.
All this means that when copper stocks go into rally mode again, I want to own pure plays in copper—Freeport McMoRan rather than BHP Billiton–with lower than average costs of production, and for the long term a decent pipeline of promising new mines under development.
That description would put Freeport McMoRan at the top of my list followed by the very volatile Taseko and then by Southern Copper.
I don’t want to buy any just yet. And I’ll have more on a specific pick if prices move the way I’d like them to—or when I give up waiting for even a mini correction in the industry.
QE 2 won’t lower our standard of living. What has lowered our standard of living is gorging on debt for 30 years. Warren Buffet’s allegory about the farmer who never works, has been sounding that alarm in his shareholder letters for years. Nobody listens.
Voters don’t listen. They vote for whomever promises the most and demands the least. Politicians don’t listen; they get rewarded by the voters for not listening. Consumers don’t listen- they’ve been living beyond their means for years. How in the world could a country have a negative savings rate for seven straight years (2000 – 2007) and not expect their standard of living eventually to fall?
The US and its debt problems is like Aids circa 1985. We’ve already contracted HIV and it is therefore inevitable that we are going to get the disease and die- it’s a fait accompli- even though we may not have contracted it yet. It’s in our blood; there is nothing we can do.
Printing money was as surely going to happen as gravity, because an overt default ala Argentina was never in the cards. The dollar has been dropping for years, losing its relative purchasing power for 25 years. It only goes up when the rest of the world pukes up a lung, ala LTCM, Russian currency crisis, MBS constipating the system, etc. But those are blips. A falling standard of living is as certain as gravity for anyone foolish and shortsighted enough to run the fiscal, trade and current account deficits we’ve been running literally since 1980.
But don’t blame Bernanke, or Geithner, or Obama, or even Bush. This disease was contracted years and years ago. THey just happen to be standing at the podium when HIV positive became full-fledged AIDS.
Jim, you mention “currency chaos” – is this a reference to the mad rush by developed and developing economies alike to debase their currencies to gain trade advantage? The Fed’s “QE2”, planned quantitative easing, is, in effect, inflating the dollar (i.e., decreasing effective purchasing power) and, thus, lowering our standard of living. Please share your thoughts about this trend and its effect on asset class values, particularly commodities. Thank you.
market_dogma:
I found it interesting as I know that other precious metals, such as platinum & palladium are now recovered in Montana at Stillwater Mining from old catalytic converters. Knowing how tough it is to do anything in California, I would be shocked if the Mountain Pass mine is reopened. I think recovery is more likely, but I guess it depends on the Federal/Military push.
Run26.2,
great article. Thanks for sharing. I understand this process is more refined, but you have to wonder how competitive the market is when you have back alley shops in India, south Africa, Thailand and China that goes through and recycles this stuff by hand and with out all of the environmental protection and regulations. I hope Japan is successful with new technology.
jim,
You are suggesting these copper stocks when the prices are already high. That means other investors figured out earlier than you. And now ieasy money is made. As they say buy when no wants to touch it rather than buy when every one wants to buy.
what about interactive brockers to sell jubax?
Off topic, but on mining: Japan recycling for rare earth metals:
http://www.nytimes.com/2010/10/05/business/global/05recycle.html