Copper Outlook Shiny

Brian Hicks, who co-manages our Global Resources Fund (PSPFX), is in Santiago, Chile, this week for the 9th annual CRU World Copper Conference— the world’s largest gathering of companies and analysts in the copper industry. Below are notes from Wednesday’s session that Brian sent back for the U.S. Global investment team.

Potential tailwinds

  • Jose Arellano, CEO of Codelco (Chile’s national copper company), estimates that global copper consumption will increase by 5.4 percent in 2010 to 18.5 million metric tons.  Chile is expected to supply nearly one-third of global mine supply.
  • Michael Jansen from JP Morgan Chase thinks copper could average $8,000 per metric ton in the second quarter of 2010 due to strong industrial production (IP) growth (7 percent) in 2010. He argues that there could be further upside for commodities given that only one-third of the net loss in global IP has been recovered following the peak in 2008.
  • John Tilton from Colorado School of Mines talked about the speculative demand and the price of copper. His research showed that much of the copper price gains from 2003 to 2006 can be attributed to fundamentals given declining inventories and futures backwardation.
  • The head of CRU's China division does not think China is in a property bubble. Real estate appreciation in 70 cities is at 10.7 percent through February 2010, comparatively low and within the context of income growth.

Potential headwinds

  • CRU estimates that there is approximately 500,000 metric tons of speculative copper inventory in China that could hit the market.
  • Tilton highlighted that much of the copper price gains in 2008 and 2009 could be more a result of strong investment demand rather than rising consumption.
  • Both global and Chinese IP are expected to slow from this year's level as worldwide economic stimulus spending begins to wind down, but should remain at constructive levels to support current pricing.
  • Given the rate of change in metals prices and IP, it could be argued that current copper prices are already pricing in a strong recovery and may not have much more upside.