Copper Demand: Not as Weak as You Think

 |  Includes: FCX, JJC, SCCO, VALE
by: Daniel Moser

Before everyone freaks out about the claims that copper demand has seized and will never return, lets take a little look at the supply and demand balance for copper from 2008 through projected 2010.

First, let me put in a disclaimer that this information is according to Barclays' data. The article I wrote a few days ago, which argued that estimates for supply side growth are a staggering 8% for 2010, was far too optimistic as for the general analyst community. The data shown below is from Barclays and, as such, their production growth estimate is much more modest than 8%. So there is no contradiction between what I wrote a few days ago and what I am writing now. (Click to enlarge)

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Items to note from the above data:
  • Even with a weaker Q4 relative to Q3, global consumption of copper has declined by only 1.9% during 2009 (approximately). Of course, some of this consumption might very well be stockpiling and not actual consumption of copper.
  • Even if the demand for copper slows down in China to some extent, by examining the above data you will see that consumption is starting to pick up in other regions of the world.
  • The chart below shows apparent consumption of copper vs.. semiconductor production. As most people know, copper is nicknamed “Dr. Copper” because it is in fact a base input for a lot of different industries throughout the world, semiconductor production being one of them. This is to argue that a fair amount of copper is likely being consumed even if a significant portion is being stock piled for future consumption.
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  • Furthermore, focusing on a 1-year time frame for the copper story really misses the point. The world is shifting. As the world shifts, resource rich countries will attempt to diversify their own economies away from the dependency on natural resource exports, which is to imply that they will want to modernize. We could see this in President Dmitry Medvedev recent visit to Singapore to promote stronger ties with the high-tech island as he seeks to modernize Russia's economy.” Why does this matter? “High-tech” requires copper! Furthermore, labor intensive countries, i.e. China and India, are the so-called rich countries now, and as they develop a much broader middle class, their levels of consumption (requiring more copper as an input) will be increasing. Ten percent of this theme will not have played out over the course of 2010. Focusing on 2010, is like focusing on the first mile of a marathon: it doesn’t do you any good to be the leader that early on if you can’t finish the second mile.
  • Not to mention the fact that the U.S. Dollar may very well reverse its course for some period of time. I personally believe that a relatively significant correction will occur in the USD at some point during 2010, though I am not sure of the timing or the duration of such a reversal. However, in the longer run the trend is still down. Until fiscal order is put in place and monetary stimulus is back to neutral, the direction of the USD is down and as such commodities are just the right place to be.
So, I guess I just want to conclude by saying that demand does not appear to be nearly as bad as some would have you believe. Yes, there will be setbacks from time to time.
However, as I have said in previous articles: as long as the price of copper is well above the marginal cost of production, the copper mining industries' return on invested capital will be significantly above the S&P 500 average and, as such, copper mining represents a compelling opportunity for the long term investor.
Disclosure: Author is long FCX, VALE, PCU