Is A Major Copper Bull Being Unleashed?

When the earthquake hit in Washington last November, sliding everything to a more business friendly world, copper went on a Trump tear along with several other things. Does this have any staying power? Is there something in the world’s wiring to back it up?

Jesse Moore has an excellent series of reports on copper at Seeking Alpha. He began predicting a bear-to-bull turn in copper back in March, 2016, when copper was in everyone’s doghouse, including mine. He was saying that within 12-24 months the bear would be a bull. We are now 12 months from his call, and copper is stirring from its bear slumber. His first in the series was a country-by-country look at copper mining projects, and he compares his result with that of Chili’s government. Why should we care about Chili’s copper work? Because they are the biggest copper supply in the world, giving us about one third of the metal. The whole Chilean economy centers on copper. Then there is the International Copper Study Group (ICSG) that does a projection as well. Moore’s summary: 

I believe both groups have not taken proper account for delays in a startup or ramp of new mines, grade reductions in Chile, water shortages leading to unplanned shutdowns, reduced capital expenditure, and the replacement of risk taking CEOs with risk averse CEO’s who have slashed budgets across the world. Copper is not iron ore, and it is not nearly as easy to find and produce. The current copper price does not support growing supplies, and it appears that some producers have begun to put their collective shovels down … In reality, the world needs another mega-project before 2020, and we just don’t have one coming. The major deposits are, for the most part, found. $3.00 will easily bring on plenty of supply, but again, my belief is it will be too late. My guess is that we start to see the shortage become obvious near the end of the first half of 2017, prices will overshoot and what we saw during the China boom won’t be out of the question

“The China boom” he is talking about is what happened back in 2004, when China went ballistic building the future China – and over did it. China has been notorious for commodity hoarding to insure supply for their plans. And they did this with copper in 2004, when their Shanghai inventories did a rare thing. They rose above the LME (London Metal Exchange) inventories, the world’s standard for metal storage, just in front of the crazy copper bull market that ensued back then. Moore shows on a chart that this rare occurrence has just now happened again, the first time since 2004.

Don’t Ignore China

We need to pay attention to China and Asian copper usage in general because it accounts for about 62% of total copper usage, the Americas just 14% according to the ICSG pie chart shown in Moore’s article treating copper demand. So forget Trump’s building ambitions, copper began its breakout before the election. We need to know what’s up in China.

China’s construction contracts have continued a high rate of growth despite their economic slump, as have car sales. A lot of China’s recent copper interest may lie in the aluminum vs copper wiring battle. They have been using a lot of the aluminum wire, because it is a very abundant metal with stable pricing running a fraction of that for copper. But aluminum wire has its problems. It must be alloyed to make it strong enough for wiring and this makes it less conductive. Copper can be used in a more pure form, especially pure, newly mined copper as opposed to the 50% of annual copper usage that is recycled. Only about 8% of scrap is made into wiring. So copper wire places nearly all its demand on the newly mined half of supply. Aluminum is also is subject to corrosion from moisture and other things and must be replaced much more often than copper. China is considering going to all copper for its wires, and this Moore says, will make a big, abrupt difference in copper demand: