To briefly sum up the Credit Suisse position:
• At the Copper dinner, the consensus for 2007 copper pricing was $6,500 per tonne which was well below the $7,500 price per tonne that existed then, but well above the $6,014 per tonne price that exists today.
• Conditions remain very supportive of higher prices. Supply remains constrained, inventories are low and Chinese restocking could lead to demand surprises next year. The Dinner participants said that European demand was continuing to strengthen.
• The biggest concern at the CS dinner was not a slowdown in US housing starts (28% vote) but rather the impact of the current Chinese credit tightening (56% of vote).
• CS economist Dong Tao opined that once the current credit tightening was lifted, a major restocking cycle in copper could occur. Dinner participants speculated that the size of this restocking could be between 200,000-400,000 tonnes and may add 2% to global demand next year.
• Clearly, infrastructure remains the key to longer term demand for copper, but CS gave the amazing opinion that China’s new rail and underground spending programme in the next five years could be bigger than the combined spending of the rest of the world total investment in the last 20 years.
• India, which is another robust emerging economy, has announced a $350 billion infrastructure spending programme. At current growth in Indian copper demand of 16% pa, CS expects the country’s demand for copper to increase from 4% of global consumption to 10% by 2010.
• Copper represents ~35% of BHP’s FY 2006 operating profit and ~53% of Rio’s first half 2006 earnings. Given today’s 21 year valuation lows, these stocks could rally.
So, is it any wonder that Freeport-McMoRan made a bid with a +33 pct premium for Phelps Dodge? It’s part of a long-term planning process.
Click charts to enlarge: