The Commodity Investor: Amine Bouchentouf

Copper prices are on their way to $4 per pound, and in a perfect global macroeconomic environment may even hit $5 per pound by the end of the year. During the third quarter of 2012, copper prices started seeing some major action on the upside. In early September, strong manufacturing numbers coming out of China and India helped push copper prices from $3.40 per pound to above $3.80 in a matter of weeks. However, bearish signs from Europe and the United States put a lid on prices and the rally began to sputter, pushing copper back to the $3.50 range in the early stages of the fourth quarter.

Specifically, traders worried that a breakdown in the Eurozone would wreak havoc around the world, slow manufacturing and have a severe economic impact in many of the world’s key regions. As a result, the rally that began in September and was on its way towards $4 a pound faltered. But the doomsday scenario that some traders expected never came, and copper remained above the $3.50 mark throughout the fourth quarter of 2012.

Market fundamentals

As the new year begins, the outlook for the red metal is looking very positive. As of right now, prices are sitting at $3.78, just shy of the previous high of $3.80. In fact, based on fundamental market analysis, the Commodity Investor believes that prices may even hit $4 a pound in the months ahead.

The biggest drivers in the copper market are Chinese construction and manufacturing. China accounts for more than 40 percent of global copper consumption, the bulk of which is used by the Chinese for building and manufacturing purposes. The Chinese import their copper ore primarily from countries in Latin America, such as Chile, Peru and Mexico (Latin America accounts for over half of Chinese copper imports). The rest is sourced from countries around the world, including the United States and Australia. The United States is actually the largest exporter of copper scrap to China (copper scrap is slightly cheaper than copper ore).

On the supply side, the market for copper ore is very tight — so much so that the market for copper scrap is actually booming. Companies that gather and sell copper scrap to the Chinese are printing money. The fact that the Chinese are now increasing their purchases of scrap metal is a strong indication of how tight the market for ore actually is. Chile, the largest producer of copper globally, has made significant investments to boost capacity. But even with the billions the country and its mining industry have spent to boost production capacity over the last several years, production rates are only increasing nominally.

Demand-wise, the Commodity Investor expects that Chinese demand for the red metal will increase by another 5 percent this year. That will come on the back of very robust manufacturing numbers and the continued expansion of the country’s urbanization. The domestic construction industry is continuously placing large orders for copper and the other base metals required to complete developments. Don’t forget that copper is used for electrical wiring, so any building or house that’s built will need to be outfitted with copper wiring.

Outlook for 2013

As discussed in the section above, supply on a global basis is fairly limited, while demand from the world’s largest consumer is robust and should continue to grow in the years ahead; there is thus a solid base from which copper prices can rally in the near future. In addition, the United States, specifically the US housing and construction industries, is a major copper market driver.

Up until 2001, the United States was the largest consumer of copper in the world. It lost that title to China when the Asian country entered a multi-year economic expansion. That said, the United States is still a major driver in the copper markets — after China, the US is the biggest consumer of copper globally, accounting for some 20 percent of copper consumption. And news coming out of US housing and manufacturing is starting to look very good.

The housing crisis of a few years ago plunged America into one of the most severe economic crises since the Great Depression. Five years after this crisis, US housing is starting to show signs of strength. Housing prices have stabilized and, more importantly, the number of new homes being built is now increasing. In addition, manufacturing has now picked up and the latest numbers for US manufacturing have been excellent.

Based on all these factors, the Commodity Investor believes that copper will have a good year. Prices are now near the $4 mark and, if there is a supply shock or very robust activity in either the Chinese or US manufacturing sectors, expect prices to rise towards the $5 mark. However, copper is a volatile metal, so make sure to monitor your position actively.

Be on the lookout for the new copper ETF by JPMorgan Chase (NYSE:JPM), the XF Physical Copper Trust. This ETF has been approved by the SEC and should go live very shortly, giving investors the ability to trade copper futures through the convenience of an exchange-traded fund.

 

Securities Disclosure: I, Amine Bouchentouf, hold no positions in the stocks mentioned.

Columnist Amine Bouchentouf is a partner at Parador Capital LLC, an institutional advisory firm focused on commodities and emerging markets. He is the author of the bestselling Commodities For Dummies, published by Wiley. Amine is also the founder of Commodities Investors LLC, an advisory firm dedicated to providing insightful information on all things commodities.