Copper Industry Fears Overblown
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The 13th World Copper Conference, held in Chile from April 7 to April 11, took place during troubled times for the copper industry.
After all, the price of copper has fallen by about 10% in 2014, and it recently hit a four-year low at about $6,550 per ton on the London Metal Exchange.
Surprisingly, though, the talk at the conference was rather upbeat.
One explanation is that, even at current prices, the major producers aren’t suffering. Take the world’s largest producer, Chile’s Codelco. Yes, its costs have risen at twice the global rate – 60% versus 30% – since 2007. But at around $3,600 per ton, Codelco’s costs still leave room for a comfortable profit margin.
Only the smaller, high-cost producers are under the gun at current prices.
Surplus Not As Bad As Some Fear
But what about the copper surplus that investors on Wall Street have been busy speculating?
Conference participants acknowledged that yes, there will be a surplus. But Wall Street has blown it all out of proportion.
The surplus in the refined copper market will be less than 500,000 tons at its peak in 2016 . . . only about 2% of annual global consumption.
And by the end of the decade, copper will again be in deficit. The supply gap is expected to quickly widen, with production falling behind expected demand from places such as China, the world’s biggest consumer of copper.
In fact, the market has reached a point where even a slower economic growth rate means a good volume increase in copper consumption. That’s likely why a Chinese consortium recently bought the Las Bambas copper mine from Glencore Xstrata PLC ADR (GLNCY) for $5.85 billion.
The Las Bambas mine is one of the lowest-cost, higher-quality copper mines under development (about 60% complete) anywhere in the world.
The China Fear Factor
Speaking of China, Wall Street is all aflutter about the collapse of copper-fueled financing deals in that country. Investors fear that these failed deals will kick the legs out of the copper market, especially after Chaori Solar Energy Science & Technology’s bond default.
But again, the fears are probably overdone. There are only about 600,000 tons of copper involved in these Chinese financing deals, and many of them still remain profitable.
The structure of the deals also limits the damage to copper prices, even if there are defaults. You see, the companies use letters of credit to buy copper, but they almost immediately sell the copper and invest the money into high-yielding local cash instruments.
Translation: Chinese companies aren’t holding copper as collateral.
The bottom line here is that the fears plaguing the copper market are overblown.
Longer-term investors may even want to look ahead several years to when the market will again be in a supply deficit.
Start looking now among the major, publicly traded copper producers for companies with global long-term copper projects. tart with Glencore Xstrata, BHP Billiton ADR (BHP), Freeport-McMoRan Copper & Gold (FCX), Rio Tinto PLC ADR (RIO), Anglo American PLC ADR (AAUKY) and Grupo Mexico (GMEXICOB:MM).
The time to buy is when stocks are out of favor on Wall Street . . . And thanks to overblown fears, that time is now.
And “the chase” continues,