Decades ago, one of my first jobs was digging holes in the ground to access buried phone lines. It was delicate work, so I couldn’t use a backhoe. Instead, I muscled a wooden stick with a blade at the end.
The pay was the pits, so the job attracted a lot of shady characters, including thieves just released from prison and gangland murderers in the federal witness protection program. I remember listening to one guy’s story about a mob hit and asking him, incredulously, “Should you really be telling me this?â€
My co-workers also had a little side business: They’d take the long pieces of cast-off phone cable out to the woods and burn off the rubber coating over a fire. What they were left with was copper, which they’d sell at scrap metal yards for about $0.78 a pound.
Copper is worth a lot more these days: In just the last year, it’s doubled to about $3.38 a pound. And copper thieves are taking a lot more chances to get their hands on the metal. So far this year, a handful of people have been killed trying to steal copper out of live electrical wires, and a whopping 30 copper thefts have been big enough to make national news.
It all goes to show just how scarce and valuable copper is becoming.
Nevertheless, there are always a few people who think copper prices have peaked. I disagree, and this morning I’ll show you why.
Copper Shines in
Many Applications
Approximately 90% of all known copper reserves are located in just four regions: The Great Basin of the western United States, central Canada, the Andes region of Peru and Chile, and Zambia.
Once you get it out of the ground, copper pretty much lasts forever. The ancient Egyptians invented copper plumbing around 5,000 years ago, and a network of their tubing, found in a great pyramid, remains intact to this very day. Copper’s ability to withstand corrosion is why we still use it for pipes today.
Also, as my pit-digging friends knew, copper can be recycled almost indefinitely without losing its form. And among pure metals at room temperature, only silver has higher electrical conductivity.
Copper is currently being used in everything from the infrastructure of the World Wide Web to computer chips to the Space Shuttle.
And there’s another application that a lot of people miss: Cell phones! About 7% of a cell phone’s weight is copper. That really adds up to a lot of metal when you consider the hundreds of millions of units being sold.
Here’s why this demand surge for copper is not subsiding: According to market researchers at IC Insights, the worldwide cellular phone subscriber base should hit three billion by the end of next year, about 45% of the world’s population. IC Insights estimates 965 million cell phones will be sold in 2006, and possibly another billion in 2007.
Is that bullish for copper? Heck, yeah! But this is just one reason why I believe …
Copper Prices Should
Continue to Climb
Current global consumption of copper is approximately 37 billion pounds and is expected to increase another 3.5% in 2007.
Meanwhile …
- A production shortfall has forced consumers to tap stockpiles. Copper inventory monitored by the London Metals Exchange recently fell 3.1% to 117,575 tons. LME stockpiles are now equal to less than three days of global consumption.
- China and India continue to expand. They’ll need lots of the metal for everything from wiring to machinery to Internet infrastructure. The demand in India and China is just going to be huge.
- China presently accounts for approximately 22% of refined copper consumption. It’s both the largest consumer of copper and the primary source of demand growth. China will probably use 13% more copper in 2007, up from an expected 7% increase this year, according to Goldman Sachs.
- Also in China, infrastructure spending hit about $201 billion last year. Going forward, they’re really pulling out the stops. Guandong Province alone will spend $37 billion building new infrastructure. And Beijing plans to pump nearly $40 billion into a massive building spree to make sure the city is ready to host the 2008 Olympics. All this means more demand for copper.
- India is no slouch, either. Growth in India’s $775 billion economy is being driven by rising consumer spending and increased government outlays on infrastructure.
- Last year, India spent $28 billion, or 3.6% of GDP, on infrastructure. And India is planning to increase its spending on infrastructure by 25% in the coming fiscal year. This flood of new money will pour into new power plants, roads, power grids and more.
- Over the next ten years, India says it will spend $400 billion on infrastructure. However, I think it will end up investing a lot more than that. Reason: India’s middle class of 300 million people is growing by 10% a year. To stop them from emigrating, the country will have to improve its infrastructure substantially.
Bottom line: Both China and India will cause surging demand for copper. On top of all this …
Copper Supplies Could
Be Derailed by Strikes
Labor troubles could cripple copper production. Workers see prices going higher so they want higher wages. But mine owners, desperate to hold down costs, say “no way.â€
Three recent examples:
- A strike at Grupo Mexico’s La Caridad Copper Mine plagued the firm for over four months this summer.
- A strike at Escondida in Chile, the world’s largest copper mine (8% of total supply) also lowered global production.
- A strike was narrowly averted at Teck Cominco’s Highland Valley mine in Canada.
Now, market watchers are wondering which mine will be the next to see labor troubles. And going forward, more labor troubles could put a squeeze on supply even as demand ramps up. To me, this paves the way for higher prices.
How to Play Rising
Copper Prices
One way to play the potential move in copper is through the large-cap miners. Companies like Southern Copper (NYSE: PCU), which operates mines in Mexico and South America, should do well.
Southern Copper’s earnings rose 40% in the most recent quarter, while revenues gained 33.8%. But the stock trades at just four times trailing earnings, three times forward earnings, and has a price-to-earnings growth ratio of just 0.64 (a PEG under 1 is considered good!). Talk about a copper steal!
Also, did you know that ETF Securities recently launched 29 commodity-tracking funds, known as Exchange-Traded Commodities (ETCs), on the London Metal Exchange?
One of them, ETFS Copper (Symbol COPA on the LME) tracks the performance of the underlying metal. If your broker has a foreign trading desk, this fund provides another great way to trade copper.
By the way, I wouldn’t be surprised to see a U.S.-based copper investment vehicle in the near future.
Good luck and good trades,
Sean
P.S. Four hours from now, at noon Eastern Time, is your last chance to get in on the ETF Power Trader’s China recommendation going out this afternoon. If you don’t want to miss it, call 1-800-393-1706.
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