somethings gotta be wrong, page-35

Investing in copper
Keith Cotterill
Published : Thu 13 Apr, 2006

[link to www.dailyreckoning.co.uk]

Investing in copper

Five-year...ten-year...20...then 25-year...now
ALL TIME highs - copper prices are literally going
nuts.

The copper bull story is quickly told — and quickly
grasped when you see the performance of Phelps Dodge,
(one of the world's largest producers of the metal)
in the past 16 months:

- Supply is down - Chile’s production has slipped
and new mines aren’t being discovered. Prospectors
haven’t found any easy (cheap) new fields in 100
years. In short, we’re running low on supplies...
dangerously low.

- Demand is through the roof - Copper is needed for
wiring and plumbing and there is seemingly no viable
substitute.

China’s roaring economic growth is being powered by a
massive build-out of the electrical grid, and this
demand alone has shaken the delicate balance that
held copper below $1 a pound for decades. And I mean
shaken it to the ground: at $2.30 a pound, which it
has now hit, we are in uncharted territory.
Investing in copper: Indispensable uses
Though copper is neither a precious metal nor a
source of energy, it boasts indispensable industrial,
technological and economic uses...it's one of the
most important nonferrous commodities today.

Prices have soared in the last four years with all-
time highs being achieved this week. Those companies
that produce and sell copper have watched their
revenues and profits skyrocket in this time, and have
consequentially provided their shareholders with very
handsome gains.

In the 1980s and 1990s commodities were beaten and
battered. Inventories were full, mines and drills
were shut down left, right and centre, and for all
consumption purposes, commodities were cheap and easy
to get. Aside from the occasional bear-market rally,
from an investor’s standpoint commodities were the
dogs of the markets.

Well, how times have changed...The global economy is
growing at a fast and furious pace led by the super-
economies of China and India.
Investing in copper: Supply and demand
Commodities that were once undervalued are now
starting to rise in price due to the simple economic
imbalance of supply and demand. Industrial
development and growth in manufacturing and high
technology have kicked up demand for the various
natural resources used in their production causing
global inventories to sharply decline as they
struggle to keep up with this new-found demand.

Copper falls comfortably into this cycle and China’s
voracious appetite for this metal has almost single-
handedly emptied warehouses, drastically decreasing
worldwide stock levels.

Look what happened in July of last year...copper
stocks at the London Metals Exchange (LME) hit 31-
year lows of 25,550 tonnes...the equivalent of less
than two days of global consumption. The hundreds of
warehouses around the world, most commissioned and
approved by the major metal exchanges (LME, COMEX,
SHFE) have seen their inventories hit dangerously low
levels.

According to Zeal.com, China’s demand for copper has
hit such extremes that in 2002 it created a large
state-owned enterprise to exploit the international
development of nonferrous metals, mainly copper. The
firm is called China Nonferrous Metal Mining &
Construction Co., Ltd. (CNMC). Nearly four years
later CNMC has operations in over 30 different
countries and is aggressively feeding its smelters
back home.
Investing in copper: "...exploit overseas mineral resources"
Upon CNMC’s creation, Zhang Jian, general manager of
China Nonferrous Metal Industry’s Foreign Engineering
and Construction Group Company (CNFC) said, "It is of
strategic significance to China’s economic
development to set up a long-term and stable overseas
mineral resources supply base. However many domestic
small-scale nonferrous companies are incapable of
solely tapping mines abroad. The only way is to
jointly exploit overseas mineral resources."

With China as well as many other growing economies
drawing down global inventories, it becomes clear why
copper prices are on the rise and why we are
currently facing a global copper deficit.
Investing in copper: How to play the bull run
So how do you play this bull-run in copper?

First and most important, just like any other metal
pulled from the ground, copper is dependent on miners
to ultimately provide the supply.

To keep up with today and tomorrow's copper demand,
mined output will need to increase.

Sounds simple...but as with all metals, ramping up
production and opening up new mines requires
significant time and capital. And I reckon it's
during that time, or cycle, that investors have the
opportunity to take advantage of rising prices.

The USA's Copper Development Association (CDA)
estimates that global copper resources are nearly 6
trillion pounds. The CDA also estimates that
throughout history only 700 billion pounds of copper
have been mined.

These massive reserves coupled with copper’s high
recycle rate show we have no imminent risk of ever
running out of the stuff. So for copper it is not an
issue of rarity or store of value, rather a matter of
ramping up supply to meet demand. And just like all
commodities, until this happens, market forces will
adjust the prices accordingly in the upwards
direction and give investors the opportunity to go
long and profit...

And that's exactly what traders are doing today
explains Keith Cotterill...
Investing in copper: Recent movements
Momentum-based buying and a continuing strike against
Grupo Mexico - causing the company to declare a force
majeure - enabled new copper futures to finish with a
gain on Tuesday.

However, the metal did back down from its record
overnight highs on profit-taking. Contributing
factors to this included a pullback in energy and
other precious metals and expectations that a run-off
will be needed in the Peruvian presidential
elections.

The most-active May copper contract settled up 1.25
cents to $2.7215 per pound on the Comex division of
the New York Mercantile Exchange.

Three-month copper in London managed to sneak just
above $6,000 a metric tonne earlier in the day, and
Comex May copper got as high as $2.7380 overnight.

Some of the support came from news that Grupo Mexico
declared a force majeure on some deliveries of copper
and molybdenum after a strike at the La Caridad
copper mine. The strike itself, which began on the
24th March, also remains a supportive influence
explained Dan Vaught, futures analyst with A.G.
Edwards.

"They're still talking and it sounds like they're
pretty far apart," he said.
Investing in copper: Speculative and investment buying
One trader commented that Comex May copper has now
put in a fresh contract high 10 business days in a
row. Speculative and investment buying has continued.

"There is a very tight basic supply/demand balance
around the world, and economic growth has been
surprisingly strong so far this year," said Patricia
Mohr, vice president with Scotiabank.

Traders in New York and London alike commented that
the metal pulled back from the overnight highs on
long liquidation. The May futures slipped to $2.6830
overnight, and were lower for a while in early pit
trading, before regaining their footing.

"You saw profit-taking," said one trader.

Vaught attributed some of copper's strength to
"overall upward momentum." Also, he pointed out that
the dollar was softer as copper was closing, which
does tend to help metals.

Vaught commented that some of the pullback from
copper's fresh highs may be a reaction to news
reports suggesting a run-off may be needed in the
Peruvian presidential election. The front-runner is
not expected to have a majority in the Sunday vote.
Some of copper's strength on Monday was because the
front-runner, nationalist candidate Ollanta Humala,
is viewed as favouring increased taxes and regulation
on the mining industry, which could, overtime, reduce
output.

Vaught also attributed some of copper's pullback to
other markets being unable to sustain earlier
momentum. Comex gold set a 25-year high overnight but
June futures were down roughly $3 as gold was
closing. Also, May crude was little changed near
Monday's $68.74 close after peaking at $69.45
overnight.

Right now we are seeing some weakness in response to
the addition to LME stockpiles overnight. Inventories
of copper in London Metal Exchange warehouses rose
550 metric tonnes Tuesday, leaving them at 112,350
metric tonnes.
Investing in copper: Comex stocks data
The most recent Comex stocks data, released late
Monday afternoon, were down 369 short tonnes at
19,020 short tonnes. If you ask me, this is a short-
term measure to stave back prices. But it can't last.
Just watch copper fly...

Though copper has no store of value, its innumerable
industrial uses are absolutely invaluable.

The geopolitics of copper also play an important role
in today’s copper market. And Chile is the biggest
player in there. More copper comes out of Chile than
any other country in the world, by far.

Much of it is mined by state-owned firm Codelco, but
a massive international presence is aggressively
increasing its stake into the rich Chilean copper
regions. The copper industry is so big along the Pan
American Highway, especially in Chile and Peru, that
it has become the lifeblood of their economies.

But this can pose risks too...

Only June of last year a 7.9 magnitude earthquake
rattled the country halting all mining operations.

Also towards the end of last year sizable strikes by
Chilean mining employees temporarily hampered
production.

Many analysts believe the earthquakes and strikes in
Chile are what sustained and pushed higher copper
prices last year out of fear that production would be
seriously depressed. But according to Cochilco, those
anomalies were insignificant in regard to annual
production estimates.

One thing's for sure, however...until there is
equilibrium in global supply and demand, copper
prices will remain high and most likely move even
higher.
Investing in copper: Taking advantage
The question is, how can you take advantage of the copper bull market and leverage some of your capital?

Just like the usual suspects of gold, silver and
oil...you buy the stocks of its producers.

Since 2001, the top four copper producers trading on
the US exchanges have averaged gains in excess of
450%, with some of the smaller miners doing just as
well if not better. As copper prices continue to
rise, so will the stock market gains of its
producers.

There are two key ingredients that go into choosing
the companies in which to invest your hard-earned
capital, says Justice Litle, editor of Outstanding
Investments.

"The first is timing, and second are the fundamentals
of the individual companies. Both of these
ingredients take much time and research. But it's
worth doing.

"Timing the deployment of capital involves analysing
the fundamental and technical trends of the copper
market. If you are trading for the long-term then it
is simplest to buy on the dips and ride out the
copper bull. If you are more of a short-term or
momentum player, then a little bit more goes into
your entry and exit points.

"Picking the individual companies that are best
positioned to leverage the price of copper involves
legwork as well. Of course there are always the
biggest and best blue-chip producers, but
opportunities are also abound in the intermediate and
smaller miners and explorers. But extreme caution and
prudence need to be taken in choosing these smaller
cap companies."
Investing in copper: "...the opportunity for legendary gains"
The bottom line is that the reddish metal we call
copper continues to show future promise in this
exciting secular bull market. Global inventories are
down and demand is up as the world economy grows.

Whereas in the 1980s and 1990s commodities producers,
including copper, were the black plague of stock
investing...today’s commodities bull presents the
opportunity for legendary gains to investors and
speculators.