A New ‘Trade of the Decade’

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If you’re going to be invested in a single metal this decade, my advice is to back copper. Specifically – companies that are sitting on long-life, high-quality copper resources.

He dropped out of the spot light for a while there, but ‘Doctor Copper’ is making some big moves again. The copper price fell nearly 25% earlier this year after the 2009 rally. But whilst gold hogged the headlines copper has snuck back up the chart again.

It is now only about 3% from hitting a two year high.

This latest bounce could well be the start of another decent rally too. The chart below shows the price in dark blue. In orange is the short-term trend, and the light blue is the long-term trend. Not too long ago, the two lines crossed over, and you can on the chart that this usually signals a big turning point in the market.

Copper Spot Price

Source: ANZ Commodity report

So what’s going on here? And how can you profit from it?

Copper is used in a whole bunch of things that are involved in economic growth – building national power grids, the mass production of electronic goods, and putting the plumbing in new tower blocks and so on. That’s why it’s called Doctor Copper (Phd in Economics).

Does this mean the global economic woes are over?

I don’t know. It’s certainly a confusing message we’re being sent. Uncertainty and volatility are still extreme, bad numbers keep pouring out of Europe. I’ll leave it the macro guys like Dan and Nick to solve the riddle of why copper is rallying NOW when a lot of economic problems are yet to be fixed.

What I’m interested in – and YOU should be too – is the market for this metal over the next ten years.

Put bluntly: the copper market is already huge… and it’s about to get a whole lot bigger. Global copper consumption for this year is expected to be around 17 million tonnes. At the current price the global copper metal market should be worth about US$125 billion this year. To put that in context, the global copper market is about the same size as New Zealand’s economy.

So who is buying it now?

Last year, China was the biggest user of the red metal, with 28% of demand. Construction firms used 48% of global supply last year. Manufacturing of electrical and electronic appliances takes 20%. Transport takes about 10%, and the power sector takes 5%.

Who is buying all that copper?

Who is buying all that copper?

Source: AME Mineral Economics

The commodity data coming out of China shows that demand isn’t slowing either. Copper imports are in the rise at the moment, jumping 10.7% last month. China is importing even more ‘copper scrap’, which is just reclaimed copper from buildings and so on. Imports of this jumped by 5.3% last month.

Why’s China buying up copper? Maybe because a MAJOR copper shortage is coming…

Copper inventories have steadily declined since peaking in February.

According to the Metals Economics Group, significant copper discoveries have fallen “well short of what is needed to replace the copper produced.”

Morningstar predicts “60% of today’s open pit mines will deplete or go underground (at a higher-cost) by 2021.” Rio Tinto is racing to open new mines to meet a massive “shortage coming in 2011 as United States and European demand also rises”

One mining executive has admitted to Salon.com: “Globally, economic copper resources are being depleted with the equivalent production of three world-class copper mines being consumed annually.

Yikes!

To make money as a resource investor you need to find the high ground… so you can see over the hubbub of the daily markets… and catch a glimpse of the next big high demand/low supply story.

For me, that story is copper.

My advice: Buy well-priced companies sitting on high-quality copper resources.

Dr Alex Cowie
Editor, Diggers and Drillers
for The Daily Reckoning Australia

Dr. Alex Cowie
Dr. Alex Cowie is the editor of Diggers and Drillers, Australia's premier resource stock tip sheet.
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Comments

  1. Delayed Quote for JABIRU MET FPO [JML]
    Lastsale($) Change 22 SEP 2010 13:50 Australia/Sydney –
    20 minute delayed prices during trading hours.
    0.415 0.005 or 01.22%

    An interesting long term play on Copper and other metals

    I still like OZ Minerals as well..

    Stillgotshoeson
    September 22, 2010
    Reply
  2. Heres one that’ll make you sick Shoes…Sandfire Resources (SFR). 5cents to over seven dollars

    Reply
  3. Im not going to short the market but…the reflation people will probably bust me. One way or another the dollars pouring in and AUD like gold has broken the cycle of lower highs on RSI. Welcome to the casino.

    Reply
  4. Beware those with fixed price offtake positions if the USD dives. If they tell you they have currency swaps then ask who are the counterparties?

    Reply
  5. Comment by Lachlan on 23 September 2010:

    Heres one that’ll make you sick Shoes…Sandfire Resources (SFR). 5cents to over seven dollars

    It showed up on my radar back in March ’08 when I went for a heap of speculative stocks.. Allowed 5% of my total portfolio on a bunch of them.. Passed over Sandfire.. Even if I had bought them they would have long been sold before they got to this price.
    I bought OZ Minerals so have nearly 20% Sandfire for free as OZ bought 19.9% of Sandfire for $100 million.
    25000 Oz Minerals for $1.05 now $1.40+ and 20% of Sandfire is still a trade I am happy with..

    Back in March 08 I bought Rex Minerals, Pacrim Energy, Robust, Terrain Minerals and a couple of others, some did well, some did ok and a couple hit their stops and were sold at a loss.. Sandfire was viewed but the amount I was willing to spend at the time had been reached.. Pacrim had found Gold and so to had Robust, Market was in full bear mode so I figured Gold would be a better short term play than Copper…
    Never look back on what could have been.. Shares or Houses.. There are people that have multiple investment properties.. they have found that some properties have performed better than others… that’s just investing..

    I have a system.. It is not perfect, but it works well enough for me. I set a maximum amount of exposure (5% of portfolio to the trade) set my Buy/Sell/Stop limits. Occasionally I will raise my stop if a company is approaching my sell position but still looks good.

    Stillgotshoeson
    September 23, 2010
    Reply
  6. That sounds good Shoes. As for SFR, my father (over 70yrs and loves share trading), he pointed them out to me when they were worth almost naught. We both gave them a miss…dont talk about em these days ;)

    Reply
  7. Lynas guy double speaks the US State department China – Japan wedge politic mantra

    http://www.smh.com.au/world/trade-fears-as-china-denies-restricting-exports-to-japan-20100923-15ot6.html

    Brave man that one …. or just a stupid smart arse pratt that puts himself in the crosshairs

    Reply

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