HardAssetsInvestor

Written by Julian Murdoch  |

December 17, 2009

Copper: Further Steady Times Ahead?

Details

Copper's been Mr. Consistent this year, recovering from last winter's lows. But is 2009's ramp-up headed for a repeat?

• How the hope of economic recovery has pushed prices higher
• Will Australia's declining output cause a supply deficit next year?
• Which matters more: the dollar or China? 

 

Up, Up, And Up Some More?

 

 

Copper is up nearly 130 percent since the beginning of the year—not a bad run, especially given the sluggish pace of the economic recovery.

In some ways, copper has risen on a warm thermal of hope and prayer—the expectation of economic recovery, rather than recovery itself. With building construction accounting for anywhere from 25 percent to 46 percent of all copper demand and electrical transmission comprising another hefty share, conventional wisdom says that as the economy heats up, copper consumption should rise. But until recently, there really haven't been any numbers domestically to support such an idea—certainly not any economic indicators that, by themselves, justify a stone-cold double in the red metal.

But with the Fed's recent nondecision to keep rates "exceptionally low" for "an extended period" and its lukewarm, "it-ain't-so-bad" guidance on the economy, conditions might actually turn out to be relatively decent for the construction sector. After all, if you're a homebuilder, a booming economy with zero interest rates is your perfect storm. And while we're far from a boom, there is some evidence suggesting at least a little pickup: Housing starts in November rose 8.9 percent from October's estimate (although they're still lower, year-over-year), and building permits were also above October's estimate by 6 percent.

But housing alone doesn't tell the whole story in copper right now.

Could Aussie Supply Issues Cause World Deficit?

On the supply side, things are looking tight, at least for Australia, the world's 5^th-largest producer of copper. A recent report from the Australian Bureau of Agricultural and Resource Economics (ABARE) forecasted less production for next year:

 

 

Although as recently as September, ABARE had forecast Australia would export 310 million tonnes of refined copper, on Tuesday, that projection was slashed by 15.8 percent, down to 261 million tonnes. And it's not just exports that are expected to drop; the forecast for refined copper output also took a hit, dropping by 13 percent to 408,000 tonnes.

Lest you think this is a reaction to depleted demand, ABARE cites problems with BHP Billiton's Olympic Dam mine for most of the production decline. The Olympic Dam mine sits on the 4^th-largest copper deposit in the world and produces roughly 200,000 tonnes of copper each year. But an accident in early October shut the mine's main haulage system, cutting production by 75 percent. BHP Billiton expects the mine to be back in full operation by Q3 FY10—aka the first calendar quarter of 2010.