Death by Copper
Friday, 12/10/2010 11:25
Copper, it turns out, is a cold blooded killer...
"DRUGS, domestic violence, copper theft and burglary lead the list..."
So says Orangeburg County interim sheriff Barbara Walters (no, not THAT Barbara Walters) to
The Times & Democrat of South Carolina newspaper,
writes Dan Denning in his Daily Reckoning.
She was talking about what's killing people in South Carolina. And you might be surprised to see copper on the list...mostly since copper is just your normal, self-respecting, malleable, ductile, corrosion resistant industrial metal, located at spot number 29 on the periodic table.
But copper, it turns out, is a cold blooded killer.
"The one [crime] that has increased almost beyond belief is copper theft," says Sheriff Barbara. "It's so much in demand by manufacturers, the price has doubled or more in the past two years.“Today's price, $3.18 a pound, could get higher tomorrow. The thieves watch outdoor machines, old-model cars and collections of electric wire. Often they return to check out the location and number of people who live or work nearby. To them, old copper is future cash; sometimes big cash."
The reason "old copper" is "big cash" is that copper futures closed at an all-time closing high in New York trading yesterday at $4.10 a pound. The intra-day high is higher still at $4.28. But it's not far off. Sheriff Barbara needs to check her prices more carefully.
There was some disagreement in the office recently about whether copper or iron ore deserves the moniker of "red gold". It turns out we've smacked the label on both at one time or another. Copper turns red when it's exposed to air. But when it's first rolled into coils for use in electricity (because of its conductivity) or in plumbing, it's just a red coppery colour.
Iron ore, on the other hand, starts of as red dirt before becoming steel. And iron ore is a lot more important to Australia as an export commodity. Exports of iron ore should generate nearly $53.4 billion this year, due to rising prices and rising export volumes, according to the Australian Bureau of Agricultural and Resource Economics (ABARE).
Exports of refined copper and copper concentrate, on the other hand, are only going to generate $6.5 billion according to ABARE. But if you're a contrarian, should you really trust the prices the market is throwing at you right now? A price should normally tell you exactly where buyers and sellers are finding each other in the exchange for a given good or service. It's the signal that tells producers what consumers are willing to pay for something.
But if the price includes a lot of noise in it-garbage pumped in from somewhere else-then instead of communicating useful information to you it might actually be lying to you. And if you act on that deceptive, low-down, good-for-nothing information, you'll probably lose money.
The copper move is terrifying and exhilarating. But what is it really telling you? Well the move from $1.25 a pound to over $4 a pound took place during the Bernanke reflation and the massive Chinese credit expansion via bank lending (another US$1 trillion this year, on top of last year's $1 trillion). Copper's strength is the US Dollar's weakness, with a strong tail wind from Chinese fixed asset investment.
There's a fundamental aspect to it, of course. The copper supply bottlenecks Alex has documented in
Diggers and Drillers are providing support. There's demand too.
China Securities Journal reports that the Chinese government will spend three to four trillion Yuan (or US$451.5 billion to US$602 billion) to expand its railway network in the next five years.
If you view the emerging world (the BRIICs) as finally decoupling form the developed world (the bankrupt welfare states of Europe and America) then copper tells that story. It's the story of fixed asset investment in a modern industrial economy and growing domestic consumption. And the story, despite the de-leveraging death spiral of 2008, is basically bullish.
But let's not forget investment demand for metals. How much of copper's rise is being fuelled by investors? With exchange traded funds and similar vehicles, big institutions and retail investors can now bet on higher metals prices by buying shares in a fund that stockpiles those metals.
It sure seems like a good thing to be able to conveniently bet on (and profit from) higher metals prices without the unlimited exposure you'd get in the futures markets. But are investment flows distorting metals prices to the point that the price isn't a real price? What if it's not telling you the underlying demand...but has instead become the volatile plaything of hot institutional money flows?
Alex at
Diggers and Drillers sent this note earlier today:
“The copper market has been hurtling headlong into a prolonged shortage. Loads of copper projects shut down during the financial crisis. Now that demand is rising fast again there's just not enough new mines producing copper to keep everyone happy. In this mad scramble for copper, the highest bidder wins.“Now the opportunists are turning up the heat. Those nice chaps at J.P.Morgan have apparently got their grubby little mitts on over HALF of the copper on the London Metal Exchange (LME). This represents 175,000 tonnes, or a THIRD of the world's reported copper stash.“Imagine you went to the pub with a hard earned thirst. It's been a hot day and you're up for a good few beers with some mates. You then find some punter got in early, and bought up a third of the pub's beer. Then he says ‘when you really want this beer, I'll sell it to you at a profit.'“The people that actually need the copper; sparkies, plumbers, and manufacturers are all in the same predicament. In my pub analogy you'd most likely be having words with the publican. But the genuine users of copper don't have this choice.“This is a game-changer for the copper market. The price is going to jump on this sudden market tightness.”
J.P.Morgan are using the copper to build a copper backed ‘exchange traded fund' (ETF). This makes it possible for anyone to buy ‘shares' in actual copper metal, with the aim of sell it for a profit to the guys that actually need the stuff. Copper producers are laughing all the way to the bank. Their comfortable margins are looking even sweeter.
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