Current Copper Prices: Short-Term Strain Vs. Long-Term Growth

 |  Includes: COPX, FCX, SCCO
by: Shaun Connell

Slowing industrial demand for copper in China has pushed the price of copper down the last few months, and is being compounded by an oversupply of copper in Chinese warehouses, Reuters reports.

I've written twice this last week about copper prices, first going over what copper prices today mean, and then discussing why it makes sense to be a bull on copper.

This is a follow-up to my article yesterday, going into more detail about why demand is slowing specifically, and why that's not a problem for the long-haul investors.

Why Demand is Slowing

Demand is slowing because the Chinese economy is slowing more than expected, meaning mines and inventories of the metal in a sense are oversupplied. This has lead to Bank of America (NYSE:BAC) metals strategist Michael Widmer to explain to Reuters:

"We have already seen a decline and it's difficult to see upside right now. Even if underlying demand in China was strong and SHFE prices rose, you have got 1 million tonnes of inventories on top. Before the Chinese start importing you have to see SHFE prices go up and Chinese inventories go down. I think the second quarter is going to be challenging."

Note that the Chinese economy isn't yet contracting, but is slowing. While a contraction is possible, most agree that the economy is simply growing less than originally believed.

This means that right now, demand for copper is still strong, but the demand is simply weakening. That, mixed with plenty of warehouses filled with excess copper, and the price of copper has taken a beating.

Long-Term Demand is Still Growing

There's a lot of debate about how much the long-term demand will grow, with some predicting it'll barely break 3% yearly growth on average, and others, like the bloggers at the Free exchange blog at, making bets that it will easily beat the 3% growth prediction, especially if exchange rates are factored in.

Still, even Michael Pettis will concede that his "barely 3%" growth prediction is an outlier, and most believe that in the next decade, the U.S. will be surpassed at least in size by the Chinese economy.

Add this to the fact that the age of the dollar is about to end, and you see some troubling trends for U.S. investors over the next 15-20 years. What to do? Invest at least partially in Chinese growth. You can do that directly or indirectly.

Different ways would be Southern Copper Corp (NYSE:SCCO) which has heavily bet on Chinese copper demand, Freeport McMoRan (NYSE:FCX), which pays a great dividend, and COPX, which has a broad investment in copper miners in general.

I'm going the indirect route with copper stocks and copper bets, as described in my earlier article linked to above. Nothing is certain, but long-term copper demand is a pretty good bet -- now I'm only looking for a market entrance.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SCCO over the next 72 hours.