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Copper, Copper, Copper

Copper went on one heck of a run from November through February, rising from US$3 per lb. to touch US$4.25 per lb. a month ago.

Runs like that can’t last forever and so this one stalled out, leaving copper trading around the US$4.10 level.

First things first: US$4.10 per lb. is a great copper price, strong enough to encourage lots of exploration and to entice investors to the space.

Of course, investors are most enticed when they see further upside. So what’s the outlook from here?

I think it divides into two parts: near-term uncertainty and medium-to-long-term optimism.

In the near term, there are a few factors at play. First, speculative investors piled in when copper went on its 40% run. Not surprisingly, many of those investors booked gains and moved on. Long fund positioning on the CME copper contract fell sharply in March. Because they are liquid and offer leverage options, funds often use CME contracts to establish copper exposure, so a downturn in long positions is clear evidence that such bets are falling off.

Importantly, short positions have not really risen. So it’s not that funds are flipping their bet from Copper Up to Copper Down; they simply played the copper game and then shifted their focus elsewhere.

That’s the momentum and speculation side. Then there are the fundamentals, which are also weaker than a month ago. Copper inventories on the London Metals Exchange (LME) have been rising, as have counts in Shanghai.

It’s important to note that LME inventories were very low in late February, so low in fact that buyers were paying $70 per tonne more to get their hands on copper right away than to get it in three months. A premium for metal today versus in the future is called backwardation and $70 is a high premium, which simply highlighted the real shortage of supply in the moment.

That supply has now eased, as the inventories chart above shows. It eased partly because shadow inventory holders sold into the strong market, moving metal onto official books. It eased partly because Chinese demand softened, likely because buyers didn’t want to pay such high premiums when such premiums (when they 5 occur in the absence of a specific supply issue) usually resolve fairly quickly, especially if buyers simply ease off the gas for a time.

Buyers did exactly that just as shadow stocks moved into official counts. All told, there’s a lot more copper around today than seemed available a month ago. As you’d expect, this pushes back on bullishness.

What will happen in the next weeks, I don’t know. It depends on whether copper inventories continue to rise, which will depend on when and how strongly Chinese buying steps back up in a lower price environment. It also depends on whether the USD eases (the dollar has gained 3% since late February, making it harder for dollar-priced commodities like copper to gain).

On a technical front, the copper price chart suggests support at US$3.84 per lb., so if the price falls below that it could well step down to $3.65; alternately, $3.84 could act as support. Volumes would also need to pick up again before I will feel near-term bullish.

However, I am very bullish on copper in the medium to long term.

There’s nothing ground breaking in my rationale. It’s weak supply versus rising demand in the context of a global economic rebound within which there is clear and specific support for green technology.

As Kostas Bintas, head of copper trading at Trafigura Group (the world’s biggest copper trader), put it in an interview with Bloomberg: “You can’t move to a green economic environment and not have the copper price moving significantly higher.” Following up, the reporter asked Bintas about sources of demand in the coming years. “In the past, copper consumption was all about China. China is very much keeping up its side of the deal. And in the rest of the world, we really are starting to see some breakout in demand conditions now.”

During the pandemic Trafigura has been polling customers across the industry and the responses point to a surge in demand across Europe and the US. “All the feedback we’re getting is that they’re seeing pretty well the best quarter they’ve ever seen,” said Graeme Train, senior economist at Trafigura, in the same Bloomberg article.

Layer in tight supplies and Trafigura is forecasting copper will hit US$15,000 per ton or almost US$7 per lb. before 2030.

Can you imagine what copper stocks would do if copper almost doubled again from here??

 Major miners would buy advanced projects, especially those with scale, good economics, and local support/good permitting progress.

 Companies with those advanced assets would see their share prices run in expectation of M&A (and based on simple value-per-lb-in-the-ground metrics)

 The market would reward, handsomely, good new copper discoveries

 The bar of requirement for a ‘good’ discovery/project would drop, a reasonable response to a much higher copper price, which means a wide swath of copper stocks would swoon.

This isn’t happening tomorrow – indeed, I laid out that there is in fact downside risk in the near term – but I am confident copper prices will strengthen over the next few years. It’s math.

That expectation is in line with Trafi’s suggestion that copper will hit US$7 per lb over the next decade. That both is and isn’t a long time. On the ‘is’ side, a lot can happen in a decade, including financial shocks and recessions that threaten this overall narrative. Just as likely, though, are supply disruptions (labour issues at major copper mines spike the spot price several times every year) that encourage the bull. On the ‘isn’t a long time’ side: commodities supercycles simply take time. And it’s a good thing they do, as it gives engaged investors time to take full advantage!

Just as it’s not too late to buy uranium stocks – it is not too late to buy copper stocks and establish a portfolio to ride this green market higher.

As for what to buy… I added Pan Global to the portfolio a month or so ago because I like the balance it offers between exciting exploration (there is SO much room to grow the known La Romana discovery and to discovery additional VMS lenses at the Escacena project) and reliable value growth (it is not trying to make a discovery but figuring out just how big the discovery it has already made is). To add to that, I am currently churning through due diligence on half a dozen more advanced projects and operators. Since I don’t expect copper to rise in the next days or weeks I have not rushed this process and so haven’t settled on my stock picks yet.

But with this copper fundamentals article done, you all understand my outlook and can expect to see some more advanced/sizeable copper names added to the portfolio in the coming weeks.

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