Guest Post by Marin Katusa via International Man
Copper has long been an excellent proxy for global economic health. It’s used in everything from washing machines to electric cars.
That’s why copper is often referred to as “Doctor Copper” – because it can diagnose the health of the market.
There’s been a lot of market sentiment that the bottom has been put into copper, and that 2020 is the year of the metal rat.
I’m long term bullish on copper, but I stated publicly in late 2019 that caution was required in the near term.
Rewind just over 12 months ago when we wrote about the potential of a copper wipeout. That research piece was one that got an insane number of eyeballs.
Many copper stocks have been taking it on the chin lately, just as they did in 2018. Copper itself ended up hitting a 2-year low of $2.51 early last Fall before trying to make a rally back to $3/pound, which failed. Now it’s back to last Fall’s lows.
In my ‘Copper Wipeout’, report I stated that most analysts that were bullish on copper had two major errors in their models.
The first error was that analysts across the board were using consensus demand side growth metrics that were too optimistic.
The second error was that analysts were too aggressive on the supply decreases, meaning they modelled overly aggressive production declines from existing mines.
I believed the “consensus” used by analysts was fundamentally flawed as the production profile declines were incorrect. The 2019 production numbers published thus far support my model – yet none of the analysts are updating their models.
What nobody took into account though was the black swan that would come in and wipe out all of the gains copper made since it bottomed out last September…
Recently, copper prices took a 12% nosedive, and things might get even uglier from here.
The reason?
Doctor Copper – A Casualty of the New Flu Pandemic
If you’ve been paying attention to the news, then you probably already know about the Wuhan Coronavirus.
Officially named the Novel Coronavirus, this latest flu belongs to the same family of viruses as the SARS and MERS infections of 2003 and 2012.
With the first case occurring in the Chinese city of Wuhan last December, the virus has since spread worldwide. The Chinese New Year, which took place on January 25th this year, intensified the problem with its large influx of travelers looking to celebrate the New Year with family.
There have been more cases of this new virus detected in China than there were of the SARS epidemic. The WHO (World Health Organization) held emergency meetings to discuss the outbreak.
It’s unclear at the moment exactly how bad things will get. But one thing is certain… the Chinese economy isn’t getting out of this one lightly.
Chinese New Year Extended
Due to the coronavirus situation, China’s central government has extended the Chinese New Year holiday by three days.
In addition, certain provincial governments have instructed corporations to delay restarts by an additional 7 days.
Flights to China have been stopped. Production plants are halted. And there are rumors of Chinese manufacturers declaring force majeure and canceling contracts from commodity suppliers. The 12% drop in copper over the last week confirms this.
All this led a Chinese government economist to predict that the country’s growth rate for the quarter may drop from 6% to 5% – or even lower.
And as the chart below shows, China’s slowing growth will have a significant effect on global copper demand. Over the past 5 years, China has averaged out to a little over half of the total global demand for copper.
Fears over the virus are keeping the Chinese economy down. And just like the doctors lending a helping hand in Wuhan, Doctor Copper is feeling the pressure.
This isn’t the only thing that’s currently impacting copper prices, though it’s certainly the most significant…
Chile and Indonesia are also in the spotlight, as far as copper goes.
Chile as a nation is the world’s largest copper producer.
Organized strikes by labor unions at several of the country’s mines caused multiple shutdowns and delays during 2019. It’s a very real risk that more unrest in Chile could impact global supply, but that fear is already priced into the copper market.
The second wildcard in the copper market is Grasberg, Freeport McMoran’s mine in Indonesia.
Freeport has been battling the Indonesian government for years, and it’s losing the battle. Grasberg is expected to produce 350,000 tonnes of copper in 2020 making it a top 10 copper producer in the world. The Indonesian government will continue to play hardball and Grasberg’s copper production will be impacted. But again, that’s all known and already priced into the copper spot price.
That said, if things in China – or the rest of the world – get worse, we could see copper go back down to 2016 levels of below $2.00.
See You Later, Alligator
My caution on copper in the short term was rewarded.
To reiterate, I’m long term bullish on copper.
Further weakness in copper could make 2020 a great buying opportunity to pick up quality copper companies at big discounts to their intrinsic value. But the time isn’t ripe just yet.
I’m an alligator investor. I don’t chase stocks. I patiently wait for my prey to come to me.
We do have exposure in the Katusa’s Resource Opportunities portfolio to copper and the share price of that stock has already doubled to our cost base. I do expect it will continue to go higher.
Has your copper stock done that this year?
Now, if copper continues its freefall… I’m on the sidelines waiting for the falling safe to hit the ground, bounce around a bit, and crack open.
There’s one copper stock I’ve had my eyes on for years. I want to own it. I know it well. But I haven’t pulled the trigger yet, as I believe I’ll be able to get it at lower prices.
My subscribers will get to know about it and act on it before I do.
Editor’s Note: A small amount of money put into mining stocks right now could give you life-changing rewards.
That’s precisely why Doug Casey and resource expert Marin Katusa just released a video on a rare and urgent opportunity that’s unfolding right now. Doug and Marin share how they’re positioned and how you could join them before the next bull market kicks off in earnest. Click here to watch it now.
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When graphene finally gets out of the lab, it will become the conductor of choice do to its properties. Copper demand will shrink to near nothing as graphene ramps up.
due
You could be right but I won’t hold my breath. I remember when they said that nuclear energy would produce electricity so cheap we won’t have to meter it. So you can hold your breath so we don’t have to.
MIT, I believe, has patented a process to produce continuous graphene and do it inexpensively. This was the needed step towards commercialization. Ramping up raw graphene production AND then being able to produce long segments starts to look like copper wire to my Electrical Engineering brain.
The joke that graphene could do everything but escape the laboratory isn’t quite so amusing any longer.
BTW – the decision to not go with Thorium was made by the military that wanted plutonium for the bombs. That is what produced nuclear power under a uranium cycle that is expensive to run and produces prodigious amounts of nuclear waste.
A molten salt reactor (LFTR) can eat current nuclear waste as fuel, does not produce weapons grade material as a matter of physics, and produces nuclear medicine by product that is current short supply.
So your point is?
“starts to look like copper wire”
Starting to look like and functioning like copper are two different things. You also mention that you believe MIT has accomplished this task. I think I will wait for the fat lady to sing on this one. Thanks for the heads up. I will admit graphene is a catchy name with interesting properties.
Graphene is electrically far superior to copper in that it has much lower internal resistance and hence results in less parasitic heat production. It’s current carrying capacity is far greater per unit area.
A graphene conductor the size of a typical Ethernet cable can handle currents where a copper conductor an order of magnitude larger would be required. The electrical losses (think transmission lines), less heat (think confined spaces like conduit) and smaller size plus much more flexible make it an ideal substitute for copper. Once graphene ‘wire’ is available, the copper mines can all but close down.
So long as there remains a “vested interest” with a puppet string to the government violence/protectionist tool, copper will always survive. And keep in mind that all of the great things you talk about also mean lower energy consumption, and plenty of folks profit from those sales as well and would seek out their protectionist friends. Clearly the key will be whether its “strengths” and costs make it so great that it can overcome even the government.
I had a cousin named Graphene. Nice girl, real pretty, owned some interesting properties that she inherited from an old maid aunt. Everybody agreed that she was a real catch, but she married a guy who frittered away her chance to turn her properties into real wealth.
Short term pleasure to be found in alcohol, drugs, ho’s and Harleys are no real substitute for the building of generational wealth and security.
Cousin Graphene’s story kinda mirrors how our opportunity to secure long term energy security with Thorium reactors was frittered away on the chase after global hegemony, using Uranium reactors to produce Plutonium for bombs.
Thorium is the solution for unlimited energy cheaply produced. But govts refuse because of potential revolution.
If people understood that what your power company charges you in ONE month is what they bought natural gas For in the open market for a TEN year supply for your home there would be revolution. Allowing Thorium, energy, to gouge people so the govt gets their tax, in this “woke”, me too world will have every socialist blue haired antifa sanders supporter pissed at govt instead of deplorable trump supporters.
A cubic foot of natural gas is 1,070 BTU of energy. To purchase this today in the market it is $3.27. How many BTU did you use last month and what did you pay?
Last month the local gas utility charged me $0.636 per 1,000 cubic feet.
Unfortunately the traits alone arent enough to change over from copper and inexpensively is a relative term. It is relative BOTH to itself and to copper and the cost benefits of both, not to mention compatibility issues with copper were it to be used in new infrastructure where copper has already been used. In addition, what about supply chains? Even if it could be a by product from another mining process, a new process of gathering, shipping, manufacturing and then molding would need to be implemented. Would these processes be able to be used in existing factories on existing metals equipment or would new equipment be needed to commercialize the process? This is further investment and time…
There are so many things to an industrial process than simple usability.
I remember that, Old Timer. I also remember Xerox said offices would be paperless within 5 years when they launched Ethernet in 1977. It is always worth visiting earlier predictions – I can’t think of one that came true.
I sure hope the price comes down soon. Copper makes good jackets for small pointy lead cylinders. They’re really necessary over 2000 fps.