Copper Supply and Demand
Copper Still Carries Electricity
By TATYANA SHUMSKY | Barron’s SATURDAY, MARCH 19, 2011
Prices for the metal are down, but the disaster in Japan makes heightened demand very likely.
The recent decline in the price of copper makes the metal an attractive asset for both short- and long-term investors.
The metal is down 6.4% from February's record high of $4.6375 a pound, as a natural disaster and nuclear emergency in Japan intensified losses sparked by weaker-than-expected Chinese demand. Friday the most actively traded copper contract, for May delivery, was down 0.1% at $4.3390.
But market attention already is shifting from Japan's troubles to the likely spike in copper demand, as the world's third-largest economy rebuilds after a 9.0-magnitude earthquake and subsequent tsunami. "Everything from the power grid, to housing construction, to autos, to consumer appliances are going to be required, and all the base-metal markets are going to benefit from the rebuilding effort," says Max Layton, deputy head of commodities at Macquarie Securities Group. As an element that conducts electricity easily, copper will be incorporated in virtually all these items.
Analysts have been busy calculating just how much additional copper Japan will need. Japan brought in about 1.1 million metric tons of copper last year, according to analysts at the Royal Bank of Scotland. At the moment, imports have slowed as shipping and infrastructure were damaged by the quake. However, when the recovery effort gets under way, Japan's purchases are likely to soar.
Even before the disaster, global copper demand was forecast to outpace supply this year and next, paving the way for steep price gains. The International Copper Study Group pegged this year's shortfall at 400,000 metric tons, or about 2% of production. Goldman Sachs forecasts the price of copper will average around $4.63 a pound in 2011, while Macquarie Group predicts prices to average $5 a pound.
If these predictions play out, short-term investors who enter the copper market at the current price, around $4.20, could make a tidy profit.
Some have argued that current market prices overvalue copper and leave miners with a wide profit margin, given that marginal cost, the cost of additional output, tops out around $2.30 a pound.
But the current marginal costs account for production at existing mines, where reserves are dwindling and construction and exploration costs have long been paid. Future copper supply will come at a much steeper price, as the easy-to-mine deposits have been exploited, and mining companies are forced to venture to less politically stable countries with higher security and development hurdles.
Finding a sizable resource takes time, as does developing it. Even a jumbo deposit like Ivanhoe Mines' (ticker: IVN) Oyu Tolgoi in mining-friendly Mongolia will need a minimum of five years of development before it is ready for production. Ivanhoe partnered with Rio Tinto (RIO) in 2009 to fast-track development of the project, which is expected to start commercial production in 2013.
Moreover, new deposits and expansion projects are barely replacing current production, meaning supply is likely to stay the same while demand continues to grow.
This makes the case for long-term investors to get into the metals market now, while copper is comparatively cheap.
