Metal Industrial Geology Metallic Copper Mineral
The demand for copper far exceeds its supply, creating a deficit that may continue for a few years. Investors expect prices to go up when conditions like these exist, but they do not show signs of an increase yet. Matt Badiali describes the current copper market as “out of whack.” Projections for a new supply of 1.8 million metric tons by 2027 come from Teck Resources Ltd. (NYSE: TECK) The market demands 4.4 million metric tons as a minimum to meet the demand. Europe’s Société Générale issued a projection of a deficit of 200,000 metric tons for 2018 and 300,000 in 2019.
Understanding the 2018 Copper Slump
Badiali attributes some of the market’s performance to investor emotion. He accepts the premise that the fundamentals of supply and demand create long-term forces, but “traders move markets on emotion.” Fears of the trade war with China accompanied hopes that the market may establish balance as it does in usual circumstances. However, he notes that the projection models do not indicate it. Badiali cites a Bloomberg report showing that delays in a Grasberg copper mine construction may worsen the situation. He asserts that mines rarely come in on time, and he has the on-site experience to prove it. He contends that chances of Grasberg’s giant Indonesian gold and copper mine completing on time approach zero. The near impossibility of building a “meaningful mine”in two years contributes to the reason that he expects copper to become “the next huge bull market in metals.” Tracing Troubles in the Copper Market
With a perspective that spans the period from 2003 to 2018, he notes that arriving at the current state of trouble started in 2003 with a significant bull market. From a price of $0.70 per pound to more than $4.60 eight years later, the metal’s performance encouraged mining companies to do some things that they subsequently realized had unfortunate consequences. They invested huge sums of money into low-grade projects on the expectation of prices remaining the same. The incorrect assumptions complicated matters when the bear market started in 2011. None of the metals escaped the punishment that followed, and copper suffered a significant blow with a slump that put prices below $2 per pound by 2016.
Matt Badiali’s ability to feel the pain that affects investors when a commodity falls more than 50 percent draws many to his advice. The unfortunate circumstances caused many of the small and mid-sized copper companies to declare bankruptcy. With the consequences that had far-reaching effects, the industry contracted. Some companies abandoned their exploration and development investments worth hundreds of millions, putting an end to exploration except for a few projects. Looking for an Upturn
Undeterred by the lackluster state of the industry, Matt Badiali notes a growing interest in electric power projects and their potential for copper. The swift growth in solar and wind power attract his attention, and he regards electric cars as “the next big thing.” With interest, he observes that they have a greater demand for copper than the “alternatives.” Production in China’s electric power industry over the past five years created a demand for copper wire that rose by 50 percent. He discounts the impact that tariffs have to “derail the trend.” The country’s production of air conditioners and refrigerators, batteries and wind turbines creates a demand while the supply remains low and continues to dwindle. Matt Badiali thinks that a focus on copper mines may give investors the “next big opportunity” to benefit from the bull market that he sees approaching. Bloomberg’s commentary tends to support Badiali’s expectations. The impetus for the physical demand for copper in China comes from a “combination of lower prices and looser credit conditions.” The country’s stimulus measures contribute as well by unlocking “pent-up demand.” Further, the price differential between the London and Shanghai markets recently offered quick profits for importers. Investing Haven confirms the projections that Badiali and Bloomberg make for the future of copper. However, a crash in the commodities space does not seem likely. However, emerging markets have a close relationship with commodities that have shown weakness “in recent months.” While copper stocks do not seem to offer good value at their current price levels, they may do so in a few months or half a year. Reviewing the Status of Copper
In a review of the performance of copper prices that started the year on a positive note after 2017, Investopedia found that they remained considerably above $3.00 for “several months.” However, the fears about the impact of an impending trade war impacted the metal’s outlook. The consequences of the apprehension sent the prices to a 52-week low in late summer of 2018. Unable to recover, the metal trades below the $3.00 mark at about $2.82 per pound.
AIS Price at posting:
18.5¢ Sentiment: Buy Disclosure: Held
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