Is Copper Signaling World Economic Recovery?
There have been plenty of questions and attempted answers about the recent strength in copper, which is often called the king of industrial commodities (besides oil of course). For example, here is Clif Droke with a try:
With the passage of each week the market is giving us more and more signs that a real recovery is afoot, not just for equity market for prices but for key industries and economic segments as well. For instance, several weeks ago I mentioned in this commentary that a leading indicator of industrial commodities demand, the copper price along with the price action of key copper equities, were pointing to increased demand from overseas. This in turn harbingers a recovery in the global economy, which bodes well for the U.S. economic recovery. The copper bullion price broke out of that 4-month lateral consolidation base as anticipated and has rallied in impressive fashion since the beginning of March with its strongest 1-day move to date occurring on April 3.
Others are making similar economic recovery arguments as well but the truth is probably closer to what the big copper producers are saying. For example, Bloomberg reports that Freeport Says Rally Unlikely to Spark Investment Jump:
Freeport-McMoRan Copper & Gold Inc., which lowered production targets last year as the price of copper tumbled, said a rally fueled by Chinese purchases is unlikely to prompt a surge in investments.
Demand is “very weak” in the U.S., Europe and Japan and global financial markets aren’t “fully opened,” said Richard Adkerson, chief executive officer at the world’s largest publicly traded copper-mining company.
Copper has gained 42 percent this year, the second- best performer among 19 raw materials tracked by the Reuters/Jeffries CRB Index. The gain has failed to persuade executives including Adkerson and Diego Hernandez, president of BHP Billiton Ltd.’s base-metals unit, that the copper market has bottomed out. Freeport-McMoRan will maintain production cuts, Adkerson said.
“There is too much uncertainty,” Adkerson said yesterday in an interview in Santiago, where he was attending a copper conference. “For the time being, we’re sticking to our plan.”
The increase in demand in the market is from China, he said. The global copper market won’t be “robust” until so-called developed economies recover, Adkerson said. Copper demand in some U.S. markets, such as commercial real estate, may weaken further, he said.
So no, it doesn’t look like the recent rise in copper prices is a signal for the global economic turnaround and bets made on such a prospect are likely to look foolish in a few months if not weeks. Copper does have some technical upside perhaps to the $2.25 area and maybe $2.50 on a spike if the Chinese continue to buy for a while longer but such price levels would represent another compelling shorting opportunity in my opinion. More likely copper will fail to break meaningfully higher and could soon head back toward the $1.60 level where it will probably be range-bound for most of 2009.
If anything, a decline in copper prices possibly along with crude oil falling back toward $40 (my line in the sand around $54 continues to hold) could occur concurrently with the emergence of a new wave of the deflationary psychology that has been largely absent from the markets in the past few weeks. I’m looking for this mentality to reappear toward the end of April or early May after the earnings season when bull and bear excrement flinging will have largely subsided. Lucky for gold and silver, their best days seem to be associated with depths of deflationary dispair, and so we might want to anticipate the next rally accordingly.
What could upset the apple cart? For one, an Israeli “surprise” attack on Iranian nuclear facilities. There has been increasing chatter on this subject especially following a recent bombing raid attributed to Israel that destroyed a smuggling caravan in Sudan alleged to be transporting contraband for Hamas. The sometimes-odious Michael Ledeen makes some fairly honest observations on the topic:
Richard Beeston, of the London Times, is old enough to remember what happened back in 1981, when Israel bombed the Iraqi nuclear reactor. First, an Israeli went around to all the allied countries, warning that somebody had better do something soon. Nobody did. So the Israelis did it by themselves.
Beeston retells that story in the process of warning us that the Israelis have been doing the same thing of late, this time with regard to the Iranian nuclear project. He thinks that the new Israeli government has at least three men who are experienced in dangerous operations. He notes that Israel just attacked an Iranian convoy in Sudan that was headed for Gaza, and the Israeli planes had to fly farther than is required to attack the nuclear facility in Natanz. He concludes by saying that Israel won’t attack without at least “tacit American approval,” but warns that time is running out.
I can add another piece to his jigsaw puzzle. At the time of the attack on the Iraqi facility, I was Special Adviser to the Secretary of State (the same title that Dennis Ross holds today), and it was quite clear that nobody in the U.S. Government knew that attack was coming. Menachem Begin didn’t ask for permission, and while there were some top Americans who were irked that they hadn’t received advance warning, I didn’t hear anybody say that the Israelis needed our approval, tacit or explicit.
If the Israelis think that Iran is likely to nuke them, I can’t imagine why they would feel constrained by American wishes. Good relations aren’t a suicide pact, after all. I doubt that the Israelis will ask any such question, in keeping with the old adage, don’t ask the question if you don’t want to hear the answer.
I’m no geopolitical expert but I have to correct Michael Ledeen (former Special Adviser to the Secretary of State). Iran isn’t likely to nuke Israel directly. Instead, they would sneak a nuclear device to Hezbollah, Hamas or other terrorist organization dejour and this group would use it for nuclear blackmail. There is a small but not remote chance that the situation could then deteriorate (Hezbollah and Hamas leadership not being the most circumspect) to the point that the device is detonated on Israeli soil. It doesn’t matter how many lives would be lost in such a “demonstration” as it would probably result in all-out (hopefully conventional) war in the Middle East.
I would add that another reason the Israelis might be running out of time is that despite appearances to the contrary they do not actually wish in the long term to undermine Obama’s new political approach (bad cop/”gooder” cop vs. Bush’s bad cop/bad cop) toward the Muslim world. If the Israelis wait to take military action later in Obama’s administration, that could undo much of the goodwill that Obama will have hopefully achieved at that point. Thus it might be better to get something done now even if it sets Iran’s nuclear ambitions back only temporarily as Israel might hope it will also set Obama’s agenda back only temporarily. Moreover, an Israeli strike could actually increase the worldwide resolve to deal with the problem in a peaceful manner once and for all, freeing the U.S. from the (mostly) sticks and (seldom) carrots approach that has worked so well (not!). As for timing on this, I would say anywhere between Obama’s 101st day in office (May 1) to June 30.
In the short run of course an Israeli bombing raid would probably set off a major price spike in gold, silver and oil among other markets. Yes, that’s my sad and shaky segway back to copper but I hope the novelty of slipping Iranian nuclear ambitions into such a dry discussion was at least entertaining if not enlightening.
best Michael Ledeen fiasco ever: http://www.vanityfair.com/online/wolcott/2007/01/im_enjoying_thi.html
looks like the Mullahs played him into outing his source via a misinformation campaign.
the guy is either a badly camouflaged Mossad agent or a complete dumb-ass, or both.
in other words, I wouldn’t give ANY weight to ANYTHING he says about Iran because it’s either badly sourced or dripping with his own violent masturbatory fantasies.
Do you actually read Clif Droke?
Regarding copper: every infrastructure program (of the BRIC states) will need lots of copper. The raise of the price of copper is not necessarily a signal for a recovery of the (world) economy but a reaction to the infrastructure programs.
Regarding Israel/Iran: It is strange that none of the “bad” regimes ever used a atomic device on their opponents - as if this threshold requires more than being “bad”. Only one nation did that … I doubt that Iran intends to use or proliferate atomic devices even if they had one.
Back to silver: The COMEX warehouses again lost about 1.6Mio Oz and now contain about 117.7Mio Oz. Let’s see whether this continues.
Ag seems to have seen its low at about $12.10 and Au at about $870. Any explanation for the price drop except “Manipulation”? It’s a pitty that the OTC market is so intransparent.
@skunky
I wouldn’t believe anything he says about Iran either but he is talking about Israel, making the point that no permission will be requested from, nor forewarning given to, the U.S. before an airstrike on Iranian nuclear facilities. It’s an extreme longshot but if it is going to happen in the next few years then it will be soon.
“Read” is such a loaded word, let’s just say I scan his stuff (and many other writers) for either particularly bad or good material.
@DiscreetSilverBug
Copper as an infrastructure play is completely bogus, the vast majority of copper is used in residential home construction, electronics (motors) and power generation. Of those 3, only power generation can be considered infrastructure and although the Chinese are spending quite a bit of money on this, it will not create sufficient demand for copper to come anywhere near to offsetting the very large decline in demand from the other sectors. The Chinese are merely building inventories at what they believe to be low copper prices and once they have enough the buying will stop and copper will be on its own once again. Unless big ticket purchases (cars, appliances, etc.) and residential construction are back near 2006-2007 levels at that point copper will be under pressure once again.
As if on cue, here we have new alleged *evidence* that Iran is engaged in “nuclear proliferation efforts”: http://www.nytimes.com/2009/04/08/nyregion/08indict.html?pagewanted=1&_r=1&hp . Although by no means definitive (it is arguably anything but), stuff like this could be used to discredit the recent National Intelligence Estimate that Iran abandoned its nuclear weapon ambitions in 2003. This is precisely how pieces of the puzzle tend to accumulate in advance — similar to what happened right before the invasion of Iraq. There are now at least two pieces in place — the alleged Iranian weapons smuggling through Sudan that was the target of a recent Israeli bombing raid and now this Iranian purchase of banned materials.
dr copper is a signal worth respecting. I would not blow it off. I think it is a reasonable indicator of copper demand.
However, in the new era of excess money printing and “peak oil” actually “peak everything”, dr copper’s signal may be either due to tighting supply conditions (lots of high production facilities mothballed) or monetary inflation concerns. I say concerns because we are currently in a deflation situation that is probably ending.
Bottom line: don’t rush out and buy stocks just because copper is going up a little bit.
I have met some pretty savy Persians who all share the same story. They escaped through some deception, one by driving his ambulance over the border and another who switched tickets at the airport. They want the West to attack the government, military targets only to undermine the mullahs authority. They maintain that it is a bizarre fiction that if the west attacks it will only strengthen the current regime. Only 5 to 8 percent of the people really support the regime and the rest are terrified. They prefer the US attack over an Israeli one. As for me I can’t wait. I want to wake up one morning to hear “In the pre dawn hours over Iran today military forces representing Nato and 23 nations finally did something.”
@eddysharpe
“Dr. Copper” is sometimes a quack, like when the copper market is being driven by Mistubishi, shady investors or the Chinese stimulus. Copper end-user demand remains weak everywhere (including in China) and that is creating a big buildup of supply that will need to be eventually worked off. It’s only been 6 months since copper prices collapsed, things are still way early. All that the current price is doing is keeping some mine production online that would otherwise be curtailed temporarily leading to supply-demand equilibrium being restored sooner than later. I hope copper goes to $2.50 on this move as that would be another fantastic shorting opportunity.
It makes sense that China would be buying beaucoup copper
whether their is an immediate need for it or not. Its
a strategic metal. It makes a lot more sense to be sitting
on a mountain of copper than on a mountain of U.S. dollars.
The copper gets more valuable (in a real sense) every day
while the dollar is positioning itself to lose and lose and lose.
I wouldn’t be suprised if China starts buying silver also.
When I say “China”, I mean the government, not any particular
Chinese business enterprise.
Copper has been rebounding for reasons economic or technical, who gives a damn whatever the reason is. At least its going up.
If silver was going up I bet everyone would be declaring the worlds end and how fundamentally sound the silver rally is.
@JohnST
If China were buying “beaucoup” copper that might be a reason to be bullish on it but in fact China appears to be buying specific quantities to support domestic industries and taking advantage of local price differentials. Certainly China is not buying copper as a dollar alternative.
@John#2
Anybody who has copper-related investments would give a damn why copper is rebounding; it matters if the bounce is temporary or has legs. As for “everybody”, who cares what they would be declaring? There are already enough fools out there declaring themselves to be experts, we don’t need everybody else chiming in. As for me, I’ll let my public record on copper stand for itself.
Silverax: “Copper as an infrastructure play is completely bogus, the vast majority of copper is used in residential home construction, electronics (motors) and power generation.” - Strong words, maybe a misunderstanding?
Your view of “infrastructure” must be different from mine. Power generation for me is part of the infrastructure. Are you living in a country with 2.Class infrastructure? Power lines made of Aluminium? No electrified railroads? The USA?
China certainly is aiming for a 1.Class infrastructure with electrified (long-range) railroads and electrified street cars in cities. Even if they use steel/aluminium wires for their high-voltage electrical power grids lots of copper is needed in the transformers and low-voltage distribution system. When these lines distribute the electrical power in the rural villages then again copper is needed to electrify the buildings and in turn will be the stimulus to buy appliances which need lots of copper.
Currently, some of the infrastructure components are bought from the industrialized countries, e.g.: http://www.dw-world.de/dw/article/0,,4113879,00.html
However, it can be expected that China will manufacture all these components and appliances in their own facilities in near-term. They will need lots of copper soon.
@silverax
Dr Copper ‘driven’ by Miss Tubishi?
Didn’t know he was into that!
Hey Tom and you guys,I came across this article and interview on the CNBC website by a guy called Joe Magayer at Motley Fool.All i can say is,of all the DUMBA*S ANAL-LYST’S out there this guy “takes the cake”.Here’s some of his REAR END talk:
“I kind of think about gold the same way I think about stamps or art, or baseball cards. It has very little intrinsic value to it – it’s basically just a really shiny, malleable metal – unlike say oil, which has a lot of industrial purpose,” Magyer said.
“Sure, gold has some (value), but the reality is, most of the value in there is just driven by speculation and fear, unlike oil, natural gas, et cetera, that people actually buy and use for industrial application.”
Yo, Joe MOTLEY FOOL wake the f*** up.
Hey why not try throwing some your stamps, collectable art,baseballcards and some bullion into a vat of sulphuric acid and see which survives.
Then again who knows?Maybe Joe “Motley Fool”your right.We could all be a bunch of dumba** idiots and hell maybe will descover the vaults of the Fort Knox Gold Depository houses baseball cards and stamps after all.
http://www.cnbc.com/id/30098164
Oh almost forgot Tom,like the new Silver Axis Forum format,NICE.
Yesterday COMEX warehouses lost more than 2Mio Oz Ag and are down to 115Mio Oz! Within a few days more than 6Mio Oz Ag were withdrawn. Where did this stuff go?
Will CEF’s announcement($750m of A shares for sale) today dilute current shareholders value? I have to admit I don’t understand what the announcement means.
SilverAxis,
Dr. copper may be a quack at times, but if you look at the long term data, he is mostly on target. I don’t think the recent run-up and downdraft was caused by a scandal like the Mitsubishi or German scandals of the 1990’s. Certainly the drawdown of copper stocks in London, US and chinese warehouses was/is indicative of limited supply.
the absolutely massive stocks of the 1990’s are gone - never to return. They were pre-China industrialization and immediate post breakup of the Soviet Union. It would take an incredible depression to keep copper down below $1.00/lb again.
Also, I still think we will see crude oil spikes starting in about a year. Virtually, all new exploration and drilling have been curtailed. Depletion is massive. A year or two of these low oil prices will send worldwide production tumbling to less than 80 million bbl per day.
right now, the commodity markets are moving lockstep with the equity markets. Eventually, this will change.
@forwill
it does not dilute existing shareholders. all the proceeds are used to buy physical silver and gold, over $200,000,000 worth, and to pay funds expenses. this is accretive to existing shareholders as now the expenses are spread out over more shares. Usually it’s a good buying opp for CEF when they issue new shares as the premium shrinks temporarily.
It’s also bullish for au/ag as they buy the real thing and it’s audited!
for those who are up to their eyeballs in physical AG with no place else to put it, it’s about the next best thing to physical if you don’t mind a little au with your ag. No options trading though but some people like to arb the premium with the etfs. Now would be a time to sell etfs and buy cef then switch back when the premium gets up near 20% again.
@DiscreetSilverBug
I said “power generation can be considered infrastructure”, what part of that did you not understand? In any case, I didn’t say power distribution (where aluminum is the main metal, even in Chinese residential housing which is typically large apartment buildings). I said power generation. You know, turbines and stuff like that. As for power in rural villages, forget it, not going to happen much beyond where it already exists in the poor countryside. China will certainly need lots of copper but it is not “soon” unless you mean the next few years.
This is starting to get interesting. As noted by another poster, CEF just did a placement and although CEF gets its bullion directly from refiners the combination of recent shutdowns such as MetMex, Doe Run Peru, etc. may be having some impact on the North American industrial supply already. As I’ve said before, something to keep our eyes on.
@eddysharpe
I mostly agree with everything you say but none of it deals with the fact that copper remains vulnerable at this moment in time and probably for the rest of this year. Higher copper prices are not due to a turnaround in the world economy or some massive manipulation but rather a combination of Chinese stockpiling and a small amount of investment flows that are likely to dissipate before true fundamentals return to the copper market.
Thanks much for the info Rob, great tips also.@rob
@Frederico K.
Hey frederico, don’t diss us stamp nerds – we might yet take over the world.
My stamp collection (British South Atlantic) has done fairly well during this crisis, thank you very much.
The SG100 Philatelic Index was at 431.01 in January 2007, stayed steady at 464.3 during late ‘08 and is now at 467.65 (Mar ‘09) – that’s better than many other pieces of paper that I could mention.
Stamps are untrackable (except for the rarest) and portable – a small envelope (rather than an armoured truck) and away you go. The bespectacled philatelist doting over his collection is taken seriously by no-one – yet can deal a few ounces of untraceable paper for millions.