Rising Copper Prices - Copper Basics, BHP Billiton, and Chile

One of the basic principle in any economy is supply and demand. I'm sure everyone has seen the graph on the left, but to sum it up simply...

...the more precious and rare something is, the more valuable it tends to be. Another perspective is the more useful and versatile something is - the demand (D) tends to be higher, drawing up the prices. (P)


Today we focus our attention on copper.

Copper (pronounced /ˈkɒpɚ/) is a chemical element with the symbol Cu (Latin: cuprum) and atomic number 29. It is a ductile metal with excellent electrical conductivity and is rather soft in its pure state and has a pinkish luster which is (beside gold) unusual for metals which are normally silvery white. It finds extensive use as an electrical conductor, heat conductor, as a building material, and as a component of various alloys.

Copper can be found as native copper in mineral form. Minerals such as the sulfides: chalcopyrite (CuFeS₂), bornite (Cu₅FeS₄), covellite (CuS), chalcocite (Cu₂S) are sources of copper, as are the carbonates: azurite (Cu₃(CO₃)₂(OH)₂) and malachite (Cu₂CO₃(OH)₂) and the oxide: cuprite (Cu₂O).

Most copper ore is mined or extracted as copper sulfides from large open pit mines in porphyry copper deposits that contain 0.4 to 1.0 percent copper.

Examples include: Chuquicamata in Chile and El Chino Mine in New Mexico. The average abundance of copper found within crustal rocks is approximately 68 ppm by mass, and 22 ppm by atoms.

Production map in 2006 featured below... it's obvious that Chile produces majority of the world's copper!! Given a ratio of 100 for the green dot, 10 for yellow, and 1 for each red deposits... Chile still produces more than the rest of the world. Given its practical and unique features, its no surprise that copper prices has gone up significantly over the last few years. http://metalspotprice.com/copper-trends/ The copper price has quintupled from the 60-year low in 1999, rising from US$0.60 per pound (US$1.32/kg) in June 1999 to US$3.75 per pound (US$8.27/kg) in May 2006, where it dropped to US$2.40 (US$5.29/kg) in February 2007 then rebounded to US$3.50 (US$7.71) in April 2007. (see below)

Recent developments further indicate that copper is likely to continue upwards. A well regarded wealth management firm CEO wrote in a memo:

"Metals - A few months ago, most analysts and investors prematurely called the end of the copper bull-market. According to these folks, such high prices were unsustainable and the copper "bubble" had popped! You may remember that I disagreed with this view and maintained my position regarding a multi-year primary bull-market for all types of commodities. Furthermore, towards the end of last year, I even highlighted copper as a great buying opportunity. Since then, the price of copper has risen significantly.

Furthermore, it seems to me as though copper is currently consolidating prior to launching higher. In case you are confused as to how copper can rise given the nasty housing recession in the US, you should take into account the fact that China uses up roughly 30% of the world's copper and its economy is expanding at roughly 10% per annum. In other words, physical demand for the metal is robust in Asia and other parts of the developing world.

It is forecast that global copper demand will continue to rise by 4% per annum over the coming decade. This implies that the industry will have to deliver an additional 1.4 billion pounds of copper every year. This is equivalent to four big new mines every year for the next 10 years! Plus, another four new mines will be required every year over the coming decade just to replace depleted mines! I do not know about you but at least in my eyes, this seems like a gigantic if not impossible task!

On the supply side, Chile is the biggest producer of copper and its power situation does not look promising. It is likely that similar to South Africa, Chile will see power shortages this year. Roughly 40% of Chilean power is hydro and 60% is thermal (mainly from natural gas supplied by Argentina). Chilean power demand is rising by roughly 5% per annum and with a reduction in hydro-electricity this year due to less rain, thermal power generation would have to rise by roughly 20% to meet demand. This seems unlikely and a power crisis in Chile seems to be on the cards. Should it occur, Chilean copper output will be affected as the operating mines receive less than adequate power supplies. Since Chile is the key player in copper, this is a very bullish development especially with the metal trading close to its all-time high. If you have not done so already, now is a good time to invest in diversified miners with exposure to copper.

Over in the precious metals department, both gold and silver continue to correct within their ongoing primary bull-markets. Having booked our profits a few weeks ago, currently we have no exposure to this sector in our managed accounts. Should prices correct in the summer, we will re-invest in precious metals mining companies."

Quoted from http://www.purusaxena.com/

For those who follow base metal prices will see that platinum has been rising tremendously over the last little while... why? Because it's found primarily in South Africa... (75%+ of world's platinum deposits found there)

So when the power halt hit South Africa earlier in 2008, it's easy to see why the prices of gold and platinum skyrocketed...it's not going to be coming out of anywhere else anytime soon!

See Reuters news below from Jan 2008
http://www.reuters.com/article/hotStocksNews/idUSL257208620080125

With potentially power problems in Chile, doesn't it make sense to conside some copper-related companies in your portfolio?

Some of the largest producers of copper in Chile are (keep in mind they produce other metals too... you may want to focus on their subsidiary dept that only produces Copper for example)

BHP Billiton (BHP)

Phelps Dodge (PD.MX)

XStrata (XTA.L)

Codelco (National Copper Corporation of Chile)

Barrick

CVRD (Vale)

As previously mentioned, the above are major producers which will likely only gain 2-4% on a good year... for the riskier part of your portfolio, a well-managed junior exploration firm for copper in South America could be a much better selection.

Some notable explorers in South America for Copper include:

Minera Andes Incorporated (MAI)

Geocom Resources (Geo)

PBX (link)

TNR Gold Corp (TNR)