Copper Proves the Commodities Bull Isn't Over - Yet

Bubble this; bursting that; it's all over for commodities; U.S. recession the death of copper; or buy financials and sell metals (the latest fashionable clarion call, you might have noticed).

The amount of words written by people who do not have the slightest clue about the commodities market is quite incredible and is nothing but useless noise. For just one thing (among many), if these people want to advise you into their favorite financials sector, well fair enough, but why you have to sell your commodities to go into financials is beyond me. Aren't you allowed to hold both?

The constant chatter neurosis of the market can suck the unsuspecting investor into thinking whatever at any minute. A new variant is how the bottom is going to fall out of spot copper as soon as he Codelco strike is resolved...oh gimme a break, yeah? Sure, this talk can move the short term market and make a buck for the sharp trader, but to make the serious money you need to see a little further than tomorrow. And to underline what the market really thinks of the future of base metals, have a look at the future contracts (obvious I know, but it’s also overlooked by those who think they know better).

Here's the LME future contract chart for copper right now:

To help read the chart, the X axis shows months out from today, and the Y axis shows the price for copper in U.S. dollars per metric tonnes.

So what do we notice? We see that the curve goes down as time goes on. A metric tonne of copper is selling at $7,700 for July 2010 delivery. In old money, that's $3.496/lb right now. So, to keep the argument simple, if you are a copper producer you can go to market with the wares you'll produce in 2 1/4 years' time, and sell it at a raging profit. Is that clear?

Well if not, then note that opportunity cost plays a part in the lower future price. Keeping to a simple model for the sake of demonstration, as a copper miner I could sell my 2 1/4 year copper production at $3.49/lb and with that money earn some nice interest. If a bank gave me 5% APR on that, my $3.49 would turn into $3.89 (a spit away from today's spot price, which is not a coincidence).

So tell me again, what is it that the commodity bears want us to believe about the U.S. recession dragging down commodity prices for the next two to three years?

But that's not all, of course. Let's note that copper producers turning their backs on hedging their product. That tells me that even though producers can lock in near record prices for the next two years, they'd rather let their bets ride. I don't know about you, but I think the fact that producers large and small, all over the world are closing their hedge books shows the confidence about future prices from the people that really matter - the copper miners.

I do tend to focus on copper, but as the traditional leader of base metals it does tend to show the way for the rest of the complex. But the point is simple; if the traders moving thousands of copper contracts a day price copper with no significant drop, and the miners who make put the metals on the market don't want to lock in that $3.50/lb, why should you think any different? And I haven't even started on the sustained Chinese demand and how last week's $3.77/lb was snapped up by bargain hunters.

Therefore, if you really want to roll the dice and buy some financials right now, I wish you good luck (I’ll wait until things are safer, personally). But at the risk of repeating the same names, why turn your back on guaranteed high profits from companies such as Freeport McMoRan (FCX), Southern Copper (PCU) or the high likelihood of continued buyouts in LatAm copper juniors, with Inca Pacific (IPRFF.PK), and Candente (CDOUF.PK) high on anyone’s list of targets?

To put it another way: GOT COPPER?

Disclosure: Long Southern Copper and Inca Pacific.

Comments

[paultaut]

I own Taseko myself...and looking for $5 plus copper over the next two years...supply isn't catching up currently...strikes...... enough power to run the mines...theft of 1800 meters...geesh...of power lines for their copper content...

I mean what the hey, what happens if congress gets all their wishes and the housing market picks up.

[firboy4]

I sold my PCU on May 2nd, last Friday. I made good money, but I had this sneaking suspicion that maybe I had sold it too early. But now I own more AUY. I hope that was a good decision. Nice article.

[jt]

Right arm!!!...Rock on!!...;)

Unfortunately, it would appear that those who know are preaching to the choir, b/c the huge majority of Americans (and probably Worldavians) still take their cue from the mainstream media (MSM) which now is worse than Pravda was in the Iron Curtain's heyday. Spin, lies, and deceit. That's the daily pabulum fed to the American public.

It's absolutely amazing how they pick reasons day after day for price rises or falls, b/c the same reason that was supposedly there the day before just up and reversed today...and there will be a totally new reason tomorrow, and that reason will very likely contradict the last two days' reasons. As though REAL life happens that way. It's like those running the MSM simply stand and throw darts at a board with all the acceptable reasons for anything...and whatever it hits...doesn't matter, as long as it's not the truth...like, hmmmmm, inflation is running greater than 12%. The CPI is a lie. The BLS should be renamed the Bureau of Lying Statistics.

Anyway Rock...as I said, rock on...jt

[Lg71050]

And then you have shills like Bob Pisani pimping on CNBC every day saying that "a lot of people are hoping that these [commodity] trades are over."

[Jake2]

jt: Glad you got that off your chest but it didn't help any. Just the facts please . . .

[Russ Abbott]

Sorry, I'm confused. The curve shows prices declining as time increases. That means that if I have copper now, I'd do better selling it now than later. To make it worth keeping until later, I would want to be paid for the interest on the money invested in my stash of copper along with some money to store it. That means that even if spot prices stay the same, the curve should go up, not down. So why does a lower future price mean that prices are going up?

[CTProgrammer]

C'mon jt, you don't believe the market was down today because Microsoft withdrew their bid for Yahoo?!? ;-)

[eric hart]

Markets in backwardation are a bullish sign in commodities, generally speaking. Commodities are also very volatile over the short term, so copper may very well fall 40% from here. But that should not be taken as a bearish sign. The bull case for Cu is that the demand is increasing, and the supply yoy is relatively flat. Similar to the case for oil, and other commodities. Buy companies such as AUY and FXC, and add as prices decline. The secular trend is up. I am long AUY.

[CTProgrammer]

Russ, the chart doesn't show that prices are going down over time, it shows that the further into the future the producer chooses to sell, the less the buyer of the futures will give them. Assuming prices stay flat, why would the buyer give today's price for copper in 3 years? They could just pay that price for copper now. They are paying less for waiting to receive the copper --- essentially because the copper producer is paying interest for receiving the money now, much like a loan. When you borrow, it costs you more in the end because the person loaning you the money wants to get paid to do it. That's the author's point --- that given the rate of normal interest the futures market is assuming prices will remain flat. If the futures market believed that prices were going up, you'd see something along the lines of a flat line, because the rise in price over time would compensate for the interest paid. If the futures market expected the prices to go through the roof, then you'd see a positive slope because even the interest charged wouldn't offset the rise in prices.

[EverydayFinance]

Hey, don't forget the fat yield over 6% on PCU. Been long for years now. I own several such high yielders from energy and shippers to infrastructure in my self directed IRA; portfolio updated regularly at Everyday Finance.