Copper prices as a gauge of economic trends

[Ardent Listener]

Commodities Corner

Oct. 8, 2010, 3:28 a.m. EDT

Copper rallies on strong emerging-market demand

Commentary: Copper prices as a gauge of economic trends View all Commodities Corner ›
‹ Previous Column

AlertBy Myra P. Saefong, MarketWatch

TOKYO (MarketWatch) — Copper has a unique ability to gauge global economic trends and the metal’s climb to a more than two-year high speaks volumes about the prospects for the world’s emerging markets.

Copper’s /quotes/comstock/21e!f:hg\z10 (HGZ10 384.05, +2.50, +0.66%) economic sensitivity is so great, in fact, that traders often refer to it as “Dr. Copper,” suggesting that it holds a Ph.D. in economics because of its ability to help predict economic trends.

“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.”


News Hub: Is the gold bubble ready to burst?The market for gold may show signs of a bubble, but it's one that hasn't burst yet, columnist Brett Arends says.
And right now, Dr. Copper’s value gauge is rising off the charts.

Futures prices for the metal climbed to a 26-month high in New York this week, with many investors convinced that demand for the industrial metal will continue to climb from countries such as China and India. Read a story on copper’s price outlook.

“The fact that the price of copper is strong means that investors are becoming confident that the Great Recession is a past story,” said Sam Subramanian, editor of AlphaProfit Sector Investors’ Newsletter. “Backed by economic growth, particularly in emerging markets, demand for copper should remain strong.”

Copper consumption in China, the world’s biggest consumer of the metal, may climb 14% this year, CRU International Ltd. said in April, according to a report in the China Daily. Consumption reached 5.94 million metric tons in 2009, the report said.

In India, copper consumption’s forecast to climb 15% to total 650,000 metric tons by the end of the current calendar year, credit rating agency Icra said, according to a September report in the Business Standard.

The expected increase in copper consumption may sound a bit ambitious when compared to the Asian Development Bank’s forecasts for Indian gross domestic product growth of 8.5% in the fiscal year to March 2011 and estimate of 9.6% GDP growth in China for this year.

Still, “the long-term prognosis that Dr. Copper is sending us is that we will see continued growth and recovery and therefore more pent-up demand for copper and other base and industrial metals,” said Kerr.

Eye on emerging markets
As with any commodity, demand is a key factor for copper – and most of that has been coming from emerging markets.

Europe, Japan and the U.S. make up about 30% of global copper demand, while around 35% comes from China, said Cary Pinkowski, chairman of CP Capital Group. So “if there is a prolonged slowdown it does not matter. China’s growth alone will absorb all new copper production going forward.”

But traders don’t know how much of the copper China’s buying is actually being consumed. It’s “conceivable” that China may be building inventory, anticipating a shortage down the road,” said Subramanian.

Christopher Ecclestone, mining strategist at Hallgarten & Company LLC, warned that “any global hiccup” will be China’s “excuse to dump some warehouse stocks on a bad trading day” and blast copper prices back below $3.20 per pound. Copper futures closed at $3.68 on Thursday

By Myra P. Saefong, MarketWatch
Continued from page 1
Page 1Page 2

/quotes/comstock/21e!f:hg\z10
HGZ10 384.05, +2.50, +0.66%


400350300250AMJJASO
“The bulls in copper are delusional to not think that the Chinese ‘market-make’ this commodity,” Ecclestone said. “It’s the easiest (with zinc) for them to throw their weight around -- and now they have big inventories to do it with.”

Given that, he believes copper has gone nearly as far as it can go.

William Gamble, president of Emerging Market Strategies, seemed convinced of that as well.

“Any demand for commodities will be affected by any break in the demand from the emerging markets, which is the only real source of demand at present,” he said, emphasizing that in China, a “break” means a slowdown, not a collapse. Read about three ways to play the commodities rally.

And for China, the general assumption is that the nation will continue to grow and thereby support demand for commodities, Gamble said: “But what if that assumption is incorrect?”

Emerging-market economies, including India, Indonesia, Malaysia, Peru and Chile, remain strong. “This is a bubble fueled by free money coming out of central banks,” Gamble said. “In these countries, a break will have far more immediate consequences.”

Even so, Subramanian thinks that “Dr. Copper is saying emerging markets should continue growing at a good clip for at least another 3 months.”

Investing in the future
The volatile copper market is not for the faint of heart, but many analysts would argue that it’s one worth investing in – and there are plenty of ways to do that.


‘Dr. Copper is saying emerging markets should continue growing at a good clip for at least another 3 months.’



Sam Subramanian, AlphaProfit Sector Investors’ Newsletter

“It’s certainly not a market for the nervous trader,” said Kerr of Kerr Commodities Watch. It’s “extremely volatile.”

But “copper has been in a progressive bull market and as housing and industry recover, coupled with exploding growth and building in China and the emerging markets, we will see prices climb even further,” he said.

“Like oil, we have a good amount of copper still to be pulled out of the ground -- the question is what is the quality and how much will it cost,” he said. “These key questions and concerns leave us with little other conclusion than the fact that copper prices will continue to rise.”

And for those willing to bet on a bright future for copper, there are exchange-traded funds and many copper producers to choose from.

Scott Wright, an analyst at financial-services company Zeal LLC, said his favorite major copper stocks include Freeport-McMoRan Copper & Gold Inc. /quotes/comstock/13*!fcx/quotes/nls/fcx (FCX 98.01, -0.04, -0.04%) , which is also a big gold producer, and Southern Copper Corp. /quotes/comstock/13*!scco/quotes/nls/scco (SCCO 42.01, +0.68, +1.65%) . He also sees opportunity in some smaller copper companies such as Augusta Resource Corp. /quotes/comstock/11t!e:azc (CA:AZC 4.13, -0.02, -0.48%) and Taseko Mines Ltd. /quotes/comstock/14*!tgb/quotes/nls/tgb (TGB 6.73, -0.03, -0.44%) .

“The copper stocks should outperform,” especially in a rising S&P 500 /quotes/comstock/21z!i1:in\x (SPX 1,176, +2.38, +0.20%) environment, he said. Wright has positions in the stocks he mentioned.

Among the ETFs, there are Global X Copper Miners /quotes/comstock/13*!copx/quotes/nls/copx (COPX 17.13, -0.08, -0.47%) and First Trust ISE Global Copper Index Fund /quotes/comstock/15*!cu/quotes/nls/cu (CU 37.08, -0.14, -0.38%) , said Subramanian, and to participate in the price movement of the metal itself, there’s iPath Dow Jones-UBS Copper ETN /quotes/comstock/13*!jjc/quotes/nls/jjc (JJC 51.08, +0.09, +0.18%) , which tracks the price of copper futures on the Comex division of the New York Mercantile Exchange.

But although he likes the idea of owning copper and copper-related assets for the longer term, he sees copper and copper stocks as “generally overbought near term.”

“I would wait for a pullback before putting new money in copper,” he said.

Myra P. Saefong is MarketWatch's assistant global markets editor, based in Tokyo.

http://www.marketwatch.com/story/dr-cop ... genumber=2