Special Report: 2.19.2009

Posted by TED Magazine on Thursday, February 19, 2009

Copper's Gyrations Put Strippers to Shame!

By Joe Salimando

Numerous people are telling the world that they know what will happen with the price of gold, silver, aluminum, copper, pancakes, Brussels sprouts, and you-name-it.

When it comes to copper, don’t you wish at least ONE expert got it right? I’ve followed copper prices and forecasts for the past five years. I am aware of just ONE correct forecast. And that wasn’t about the upside (a double-top at around $4), but someone who correctly said, years ago, that copper’s per-pound price would fall to $1.50 in 2009.

As copper’s price went into orbit, I checked. No one thought it would get above $2.25-$2.50. They were all wrong.

Why dwell on that? Let’s allow bygones to become petunias, and move on!

Here’s the problem: There will be a day after today, and one after that. A future with copper mired at, say, $.95 to $1.15 per pound will be much different for distributors than one with copper around $2.50.

Can you look at forecasts? We will, in part two of this two-part piece. But first consider this, from July 7, 2008 (a Reuters report from Asia):

Investment bank Citi sharply increased its copper price forecasts for the next two years on Monday, citing a larger-than-expected shortfall in supplies ahead.

Citi forecast copper to average $5/lb. in 2009, up from an earlier forecast of $3.50/lb., and $5.50/lb in 2010 vs. $3/lb. in its previous forecast, it said in a report.

“Copper mine production continues to undershoot expectations, mainly because of losses at existing operations, rather than delays to new projects,” the bank said.

“We now expect mine production to be some 900,000 tonnes below capability in 2009.”

Jeepers, this is the kind of “analysis” that could easily be exceeded by my maternal grandmother, a wonderful woman who spent her working life washing floors. She could have made a better call in late July.

And she died in 1967.

Housing Hurts Copper?

The U.S. Geological Survey recently posted data on the red metal in 2008. Production was up 12% over 2007. Roughly 21% of it went into electrical and electronic products.

Yes, there is a recession (or depression) underway. But it’s pretty clear that U.S. construction consumption is NOT the major determinant in copper’s price. Data on construction spending (see the December report) show private residential construction down 27% and nonresidential up 15.3%.

Those figures are in dollars. Construction inflation was relatively high last year. But the numbers still point to a logical conclusion along these lines:

• Residential construction uses a relatively minor amount of copper.
• Nonresidential consumes much more copper per 1,000 square feet.
• Therefore, it’s possible (theoretically) that U.S. construction copper consumption was flat in 2008.

Does that sound crazy?

What About China?

There’s always something HUGE missing when talking about copper’s Supply & Demand basics: China.

Take the time to read through this June 12 filing (written by the excellent Tom Stundza) at Purchasing.com, “Copper: World surplus expected to grow to 85,000 metric tons.” Words used about China:

• “apparent refined usage”
• “anecdotal evidence”
• “suggests that Chinese consumers are in a de-stocking phase”

Note that the price of copper was near the $4 level when the story posted (it ran in the magazine’s June 2008 issue). Obviously, this particular item was a fat, blindingly bright neon sign saying…

“Sell Copper Now!!!”

But read carefully; focus on the specific language Stundza used in writing this up. There’s a reason for it: He and everyone else who have followed the numerical fact-gathering by the International Copper Study Group are very aware that ICSG has no idea of what’s going on with copper consumption in China.

China’s copper use is pretty important. The Chinese haven’t reported regularly on consumption inside their borders. The reasons for this might be:

1. They get a competitive advantage by keeping this information secret.
2. China is simply unable to gather this information.
3. Gathering industrial data and sharing it with the rest of the world is something that is not now a priority for the Chinese.

What this bottom-lines to is pretty simple: The ICSG’s numbers on the world’s major consumer of copper are pure guesswork. The org assembles global supply-and-demand numbers for copper (which, after all, is the commodity on which the group is supposed to focus!).

But ICSG has wretched information from the country whose copper consumption has probably caused most (or all?) of the price to move up from $.65 to $4.

Bust Leads To Boom?

John Gross is publisher of The Copper Journal; a short article with his byline appeared in the January issue of Supply House Times. Here’s a pretty chart that appeared with the words:

 

Gross’s projection is that yin and yang will remain in eternal balance:

“[T]he current thinking is that prices will continue to fall until the excesses of the past several years are eliminated from the financial system. If history is our guide, however, once this phase of contraction is completed, a new cycle of growth will commence for the economy and for copper.”

A close reading of the article would lead one to believe that Gross, who also runs a metal management/consulting firm, is an adherent of the philosophy that says “those who know do not say.” Go ahead and click through (and come back!).

Other than the fact that prices rose and fell in the past, and that they are likely to do that again some time in the future, there’s not much in the doggone piece.

Parallel Markets?

With any commodity, the prime “fact” is the thing’s price. This is about the actual price to buy the actual stuff; the futures market’s prices (for copper eight months out, say) are reflective of something, but perhaps not actual purchases.

Using facts with which various markets have endowed us, here’s what we can know for sure:

• Copper ran up (twice—the first time in 2007) to $4/lb., or thereabouts.
• Crude oil ran up and up and up, topping out at $147/barrel.
• Copper’s second run-up and crude’s ultimate 2008 surge came at the same time.
• Crude oil fell off a cliff; copper, too, fell from a very high place.
• These were simultaneous, parallel plummetings!

[SIDEBAR: At one time, speculators were blamed for running the price of crude oil to all-time highs. One thing those who follow markets know is that speculators “go both ways.” They buy high and sell low; they sell high and buy (back) low.

Are speculators to blame for oil’s current miserable low-priced status? Don’t hear much about that, duya?]

Evidently, something happened. But the global financial crisis didn’t happen in June; it began in the second half of 2007, and intensified only after Labor Day 2008.

So what happened in June 2008? As shown in the chart (see legend below the chart), everything started falling apart at that moment EXCEPT the stock market.

Look: Everything starts to go straight to heck along about July.

BUT: The blue line (the stock market, as reflected by the Standard & Poor’s 500 Index) DOES NOT PLUMMET with everything else!

 

Above: Price comparison of –

SPX (the S&P 500 average, in blue);
DBC (an exchange-traded fund that tracks commodity prices, in black);
FCX (Freeport McMoran Copper & Gold, in red); and
OIH (an exchange-traded fund that tracks oil service firm stocks).

Tentative Conclusions

Here’s where we are:

1. Copper confuses analysts and experts. They knew nothing about a surge to $4. Copper’s price peaked, originally, at roughly 1.75x the highest price forecast by anyone, anywhere.
2. At least one “expert” source saw copper’s surge continuing on to $5/lb. Ha!
3. Numbers for China’s copper production and consumption could be worthless. That makes the untenable supply/demand figures given for the whole planet!
4. U.S. housing’s cataclysm of 2005-2008 probably was not a major contributing factor in copper’s decline.
5. You can blame the recession/depression for what started last summer, but you can’t pin copper’s price fall (and crude oil’s) on whatever happened to the stock market.

Next week: Price forecasts in review.

ADDENDUM: Other Stuff

Some copper-relevant articles you might enjoy:

New device helps contractor deter copper thieves—about a device called Mobilelock.

Mythbusting The Argument: Copper vs. Aluminum—about wiring in buildings, from Today’s Facility Manager.

The columnist comes to the conclusion that aluminum wiring is OK. This piece, which ran in the mag’s January 2008 issue, is detritus from the copper price surge, of course.

Relative performance—Bespoke Investment Group’s post on 2008 performance of commodities is illuminating (including the chart below).

  

From 2006: Raw Material Substitutions: Aluminum and PVC for Copper in Construction—I’m not sure this perspective is correct (i.e., I don’t think substitutions had much, if anything, to do with copper’s price collapse). But it’s interesting reading!

Copper & Fiber Convert and Connect—reasons to switch media, from Control Design.

	Joe Salimando of EFJ Enterprises is a consultant, web content provider, and wordsmith based in Oakton, Va. To contact him, call 703-255-1428. See also The EleBlog.
Personal Disclaimer: The appearance of the ambling pachyderm is indicative of the writer’s obsession with elephants, not his political leanings.
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