The Case for Copper
04/16/2008 12:00 am EST
Roger Conrad and Yiannis G. Mostrous of Vital Resource Investor explain why they think copper prices are heading higher again and recommend a way to play it.
Evidence of a slowing US economy is more palpable than ever. Copper prices, on the other hand, hit above $4 a pound [recently], surpassing the all-time high reached in 2006.
The clear upshot: There are other forces driving copper prices despite weak US demand from the battered housing sector. And as they become increasingly irresistible, they'll send the price of copper and copper stocks even higher in coming years.
Driving force number one is growing Asian demand, particularly from China. Most expect the Chinese economy to grow somewhat slower in 2008 than last year's 11.4%. But last year, China contributed 23% of global demand for copper. And the country's top supplier expects imports for the entire year to rise 20 percent, in part to feed a growing fleet of smelters.
Reflecting China's insatiable appetite for Big Red, the government has suspended tariffs on imported copper this year, a move that both reduces the cost to users and encourages more imports. And, as is the case with energy and a score of other vital resources, it's also on the prowl for takeovers to lock up reserves abroad.
As we've noted previously, our forecast for copper has been for a choppy first half in 2008, as the global economy works to find a bottom. Supply challenges, however, can literally trigger a windfall at any time.
We're not yet willing to say that a slowing global economy won't curb copper again this year, before a second-half 2008 rally begins in earnest. But we're more convinced than ever that the red metal is a sound investment in April 2008.
We've been arguing for the metal since the beginning of the year when investors' sentiment for copper was extremely negative because of the global slowdown in industrial production.
Sure, risks to production are still visible around the world. And there are still labor and technical problems as well as energy issues to resolve. But the latter are long-term problems for commodities, a situation that will underpin material prices for a long time.
China is important to the outlook of any metal these days, and a severe downturn will hurt prices across the board. Here's the real problem: Investors haven't been paying attention and are missing the big picture. There's disequilibrium between supply and demand; low inventories are the near-term catalyst.
Our favorite play is Freeport McMoRan Copper & Gold (NYSE: FCX). The weak price gives us ample opportunity to buy more at even better valuation levels. Buy Freeport McMoRan Copper & Gold. (It closed at $105.50 Tuesday-Editor.)