Back in April, I told Wall Street Daily readers that any fears in the copper industry were vastly overblown.
The market was hesitant about future Chinese demand for the metal, including the massive supplies held by the London Metal Exchange (LME). This concern drove the price of copper close to a four-year low in mid-March – to $2.92 a pound.
Global traders have finally reached the same conclusion I did.
Copper is now trading at a four-month high at just over $3.20 a pound on the Comex division of the New York Mercantile Exchange. The metal recently enjoyed a 10-session winning streak, the longest since 2005.
Copper prices finished the quarter in June with a gain of nearly 6%. That’s the best performance for the metal since the third quarter of last year.
Well, Wall Street was dead wrong. Inventory supplies of copper are dropping rapidly and Chinese demand remains robust.
Copper Inventories Drop
The refined copper market struck a deficit this year of 205,000 metric tons (mt). A look at the inventories of copper held worldwide shows a dramatic decline recently.
At warehouses managed by the London Metal Exchange, supplies have fallen to around 150,000 mt. This is the lowest level in six years, less than three weeks of global consumption!
Some has been moved to warehouses in China controlled by the Shanghai Futures Exchange. But that really hasn’t helped the supply situation, either…
Copper inventories at that Exchange have fallen to near three-and-a-half year lows. No re-build is expected anytime soon.
Chinese Copper Demand Still Robust
That brings us to the demand for copper from China, the world’s biggest consumer of the metal.
China was responsible for 100% of the growth in demand for copper over the past decade. Each year, Chinese copper consumption rose an average of 17%.
Contrary to thoughts earlier this year, Chinese demand isn’t decreasing.
So far in 2014, China is still importing refined copper at a record pace. Through May, imports are up 34% to 2.1 million mt.
Macquarie Securities estimates that future demand may slow to a 4% annual rate. However, on a base of 9 mt, that will translate to increased annual consumption of about 400,000 mt.
The Future and a Pure-Play Copper Investment
But why worry? Aren’t there a bunch of copper projects coming online?
Not so fast. Look at Chile, the world’s largest producer of copper.
The cost of mining copper there has skyrocketed 350% over the past decade, from $0.63 a pound in 2003 to $2.50 a pound in 2013.
So don’t expect copper to come flooding into the market due to projects from the world’s biggest producer.
This bodes well for strength in copper prices in the years ahead.
For investors looking for a pure-play on higher copper prices, there’s an exchange-traded fund that fits the bill.
It’s the United States Copper Index Fund (CPER). Its portfolio usually consists of three different copper futures contracts traded on the Comex.
As overblown fears in the copper market continue to subside, this ETF and copper prices will continue to march higher.
And “the chase” continues,