A Copper Forecast

[hammerrob]

This came from a recent investment newsletter that I subscribe to. As a little background, the writer believes that China is locking up as many natural resources as possible to build out energy transmission and infrastructure for it's gazillion citizens. Overall, he believes that if the US doesn't start doing the same thing our a**es will end up even deeper in the fryer ... so, for what it's worth ...

Looking at how China uses various commodities, what stands out is that while commodities such as steel and cement find most of their uses in infrastructure and in construction of houses and commercial buildings, one commodity stands apart. It's the one commodity in China for which energy-related usages are by far the largest share of total usages: copper.

Nearly 40% of the copper China uses goes directly to the power sector. There's a good reason for that: again we touch on the subject of smart grids, which is part of the whole process of extending electricity throughout China - and perhaps more important, preparing for the next energy revolution in that country.

There's no way that you're going to have an economy that's running on a wide mixture of different energy sources without having a smart grid, and without using massive amounts of copper. China has already begun this massive undertaking. Indeed a big chunk of their proposed $2.5 trillion investment over the next 5 years will probably be devoted to smart grids and other related energy projects. In this regard it's interesting to note that despite the fact that many commodities have been relatively weak, even copper for that matter, other commodities, such as coal, at least in terms of price have held their own very well.

One of the predictions we would make for 2012, although we must admit that we might have to wait for 2013 to see it fulfilled, is that copper is going to become regarded as a very scarce commodity. There's only so much of it in the world and, as most people know, copper grades have been declining steadily.

And all this is taking place in the context where most of the world remains stuck in a grid that just will not serve it in the 21st century. China is an exception, in that it has already begun to create its grid, but even China still has a long way to go in terms of grid development. In any event, the need for copper is going to accelerate markedly not only in China, but throughout the world.

China clearly has the edge on us: their mines in Afghanistan, and their mines and infrastructure in Africa virtually assure that any copper mined in those locations, whether by Barrick or by a Chinese company, is going to find its way to China.

Where could copper go in terms of its ultimate price? We can't say. We can remind you that less than 15 years ago oil still traded in single digits. That is not a projection that copper could go to $100, but bear in mind that in today's world things are a lot faster, and the amount of growth you can get is a lot stronger, even if growth is not accelerating as fast. One percent growth today takes a lot more copper than one percent growth took 50 years ago.

The line between sufficient copper and severe copper scarcity could be a very thin one indeed - and we fear it's likely by the time we wake up to this situation, and to the fact that China's efforts to secure massive copper supplies (or as much copper as they can possibly acquire), it might even be too late for the U.S.

Clearly, if a scarcity that is so overt and so potentially serious in terms of rare earths has not moved our Congress to consider strategic stockpiles of those metals, it's going to take a lot - and likely, happen too late - for us to consider building such stockpiles of copper.

You don't have to take my word for it. Look at how Germany, for example, has started to stockpile strategic metals - rare earths and others, which we think also includes copper.

We begin our non-precious metal commodity portfolio with copper at its core, and probably the highest weighted metal.