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Copper sinks to 17-month low as slowdown fears reinforced

Pile of Scrap Copper Rod

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London copper prices continued their descent on Friday to a 17-month low as data showed euro zone inflation hitting another record high in June, reinforcing fears that central bank tightening will push economies into recession.

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Stadtmueller profile picture
The July 13th CPI report should provide some clarity as to where we're headed in the 2nd half of 22. If it increases by any amount, commodities are likely to continue a downward spiral for a while. I am starting to place (test) LEAP long calls out to Jan 2024 on several metal stocks such as FCX, AG, AA, etc . The OIC will introduce new LEAP options on Sept. 12th, extending many commodity options into 2025, I always place LEAP Long Calls as far out as is available, and DITM, with a Delta of 85 to 90. These types of "high leveraged" calls have produced some of my best results in the past 3 years. It was Oil, NatGas & Iron ore back in 2019 & 20, but those are not on my radar right now. It would be interesting to hear what some of ya'll are thinking about specific metals, ores and individual stocks.
alex.c profile picture
@Stadtmueller Hi, I am very intrigued by the LEAP LONGs you mention.
Are they simply far out Long Options? I imagine you must buy them with a strike price at the money or a little out of the money, when the stock is cheap (eg RIO now), calculating that the chances for the stock to be much higher 6,12,18 months out. Is this what you mean? If not, would you care to briefly describe the "LEAP LONG" Option technique? :)
alex.c profile picture
@Stadtmueller p.s. sorry but what is DITM, and the Delta of 85 to 90 you mention?

Stadtmueller profile picture
@alex.c DITM means " Deep In The Money" DITM long calls have a much higher success rate as opposed to ATM or OTM. A DELTA of 85 to 90 just means that for every $1.00 the underlying rises, your option value would increase by 85 to 90 cents, almost like owning the stock, but with increased leverage.
Copper is also a viricide and its coins in your pocket, ornaments, jewelry, utensils and alloys of brass and bronze can kill CV19. Russia's threat to Europe's gas supply is undermining power-hungry industrial plants which may close, curtailing supply of metals, equipment and food. The risk of death from cold grows as winter looms in 3 months. Copper theft from utilities is rife and the finger points to the usual suspect. The West can repatriate its companies from PRC to safeguard vital supplies. PRC can focus on its new giant gas field and sell CNOOC assets in the North Sea and Guyana where it is an existential threat as an ally of the invader in Europe.
richjoy403 profile picture
"Dr. Copper" is said to have a PhD in economics because copper price trends have proven predictive of changes in the global economy. Copper's the 3rd most-consumed industrial metal in the world (behind iron ore and aluminum).

This reddish-gold metal has a range of industrial uses, and is often used in electronics due to its high electrical conductivity; demand for copper is also reflected in it's ability to be easily shaped into wiring, and it's also a good conductor of heat.

My thesis...
EVs CONTAIN 3.5 TIMES MORE COPPER than gas/diesel powered cars, trucks, & busses, and will eventually replace non-EVs--beginning with cars in developed countries, thus copper's long-term demand will accelerate due to this new and increased demand. Presently, transportation is last in copper demand by category: about 65% for electrical, 25% industrial, and ONLY 10% used in transportation and other areas.

IMO, $SCCO is in position to greatly benefit from a Nesbitt-like copper "Megatrend" to which I'd like to take advantage. It's also an alternative to picking the winners among EV makers.

Perhaps most important to my thesis, while many companies produce copper, only a few presently have sufficient reserves to expand their copper production. SCCO has large reserves, viable expansion projects, and prioritizes copper.

Southern Copper (SCCO), is presently the world's 5th largest copper producer, and is awarded a Wide Economic Moat by Morningstar, and has both mining and smelting operations. A major future competitive advantage is its ability to expand production to meet increased demand because it already has THE WORLD'S LARGEST COPPER RESERVES--68 million tons. Countries having the world's largest copper deposits are Chile and Peru (not China and Russia).

Southern is also a refiner of gold, silver, zinc, lead and molybdenum--but almost 80% of its revenue is derived from the sale of copper.

Thus I've entered a limit-buy order to initiate a position in $SCCO on the expectation that global economies turn positive, and its shares will likely grow faster than its competitors as EV demand accelerates into the mid-2030s, and beyond before leveling off after demand in the developing world finally catches up.

While I wait, SCCO pays a near 10% dividend.

BTW, a case can also be made for $BHP, which has nearly as much copper reserves, though copper production ranks 2nd to iron ore. Other candidates some may prefer: Copper is the largest contributor at $FCX; Copper is the 2nd largest contributor to coal at $TECK; and the 3rd largest contributor at $RIO.

For myself, SCCO is preferred because it relies on copper, and thus increased demand will flow through to its bottom line. In addition, companies having an increased need of copper are likely to look for sources that both specialize in it, and have the reserves to meet decades of increased demand. That its dividend yield is the highest is another plus.

[Were I an SA author, this would be the thesis for an article]
@richjoy403 Who is the majority owner of SCCO
richjoy403 profile picture
@erzs -- $SCCO meets the NYSE and SEC listing standards to be traded on the NYSE, where its average trading volume is 1.3 million shares, and a present market cap of $38.7 Billion, and enterprise value of $44 billion, and a Beta of 1.13. Since Oct 2018, S&P Global's credit rating of SCCO is BBB+ Stable.

Shares closed Friday @$50.11(with a 52-wk range of $48.41-$79.32). SCCO is headquartered in Phoenix, Arizona.

As to ownership, 89% of Southern Copper is owned by Mexican mining conglomerate Grupo México ($GMBXF), also an undervalued largecap value stock with a market value of $32 billion, and enterprise value of $35.5 billion.

Are you suggesting GMBXF's majority ownership is an impediment to SDI investment?
@richjoy403 Thank you for your answer. I was just trying to point out that maybe it is much cheaper to buy the majority owner of SCCO than buying SCCO itself.
Fcx was a great buy a few hours ago around $28
Good 👍🏽…looking forward to buy copper and other commodities mining companies at much lower multiples. Everything in the future depending on these minerals. Cheers 🥂
alex.c profile picture
@Lord TGO Investment Many analysts are really afraid of a major recession. In which case the price of copper can still drop much further...
Inflation is going to stay high till the Ukraine crisis goes on. The Fed can only cause a recession by raising rates and eroding the middle class.
They have Boris leading the West. Imagine that. The European Union needs to show leadership and find a resolution in a hurry. Biden and his administration has failed to show any leadership at all.
Unfortunately the West is getting hurt the most with these sanctions.
Even though Fcx is a solid company the Fed action will continue to hurt its price.

Maybe in a year the US will see negative interest the way Trump wanted them. Japan and Europe had em, why not here.
Clauser1960 profile picture
@notre Boris leads only the UK
@Clauser1960 If you had seen them at the G7 meeting and the interaction among them all you will see the real picture. Biden showed zero leadership but was a follower.
The European Union needs to step up and exclude the Uk in making any decisions. There needs to be an end to the Ukraine conflict. The US needs to move manufacturing away from China and distribute it among countries around the world. Investing in a Communist country was motivated by greed in the first place. The 1% have zero patriotism.
alex.c profile picture
@Clauser1960 Not for much longer....
This is a difficult environment to invest in copper or materials in general. On the one hand, I believe we are technically already in a recession. I think Q2 and Q3 real GDP will come in mildly negative. What's worse, this is not yet the consensus view or fully priced in. Much of Wall St. will mindlessly sell cyclical names (industrials, materials) going into a recession because that is the text book play from the past. However, this recession is likely to be much different in a key way: We have very hot nominal GDP growth. We are looking at 7+% nominal GDP and a deflator of 8.5% for a modest net contraction in real terms. Past recessions saw shrinking nominal GDP and roughly flat prices. That means that unlike past cycles, the value in $ of things made and sold may keep rising. The playbooks for those two scenarios should be very different. I think this is also why a recession (negative real GDP this year) isn't priced in yet- nominal GDP forecasts seem reasonable, but realized inflation keeps coming in hotter than expected.
In summary, the more inflation goes up, the lower we expect future prices to be. Does that make sense?
jerseyvalueinvestor profile picture
@ACG88 no, rates going up, curtail business and consumer activity, leading to lower expected prices and lower demand, alleviating inflation. thats the goal.
@jerseyvalueinvestor Nominal GDP is expected to increase by over 7% this year, which is consistent with a recession if the GDP deflator is 8.5% (which is the current pace). The higher rates are not leading to lower prices. They might lead to slower price increases. Demand is rising significantly, just not as fast as prices. Hence negative real GDP.
jerseyvalueinvestor profile picture
@ACG88 look at the article you are commenting on, copper sinks to 17 month low, higher rates have led to lower commodity prices already, that will filter through the supply chains in time. Also see aluminum, lumber, oil all making moves down on the commodity price side in recent times.
brettze profile picture
FCX is goning to shut down several of its aging copper mines in Arizona because the new Resolution copper mine was approved to replace them.
Another company owns the Resolution mine. FCX will have to look for a new copper mine to develop. The Pebble , anyone?
BeneGesserit profile picture
Allowing copper to fall in a sustained way is yet another nail in the green energy coffin. A massive investment in new mines is needed to upgrade grids and replace internal combustion with electric vehicles.
BuffteethrBlog profile picture
@DagnyTaggart You don't need copper to conduct electricity, you can use weed. What is happening in the West reminds me of the fall of Rome. Idiot voters voting in idiot politicians who run on feelings and not critical thinking.
Commodity prices fluctuating is highly normal.
Only lesser educated people believe green energy is a passing fad.

People like you like to run around screaming that lithium is scarce...
Lithium is actually one of the most abundant substances on the planet.
Thanks SA.
Terra Brazilis profile picture
Time to buy. Not forgetting that this is precisely the kind of asset that outperforms in inflationary environments.
Djreef1966 profile picture
@Terra Brazilis Unfortunately, inflation peaked a couple of months ago.
Terra Brazilis profile picture
@Djreef1966 Says who? You think all the trillions printed worldwide in several countries will just magically go away? That is not how things work. Increasing rates does not fix it, even if it means causing a recession.
Djreef1966 profile picture
@Terra Brazilis

Look at DJP


Use your keyboard for something useful and look up some 3 month charts.

Money flows from point to point. Follow the fund flows and you’ll make money.

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