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TLStockPicks (91.15)

Copper: Why I hate it.

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May 18, 2009 – Comments (6)

The more I think about copper, the more I hate it.  No, it never kicked my dog nor made fun of my mom, but it did lose me a bit of money through my investment in FCX, the copper mining giant of the world, a year ago.  And I can't see the upside anymore.

My portfolio is still thumbs up on FCX, but that's just a hangover from last year and I'm waiting for it to turn positive so I can close out.  When I bought into the copper hype, I bought into the arguments about how it's such a great metal and how it would be tied to the development of China and whatever other countries that were supposed to keep booming even as the US economy keeled over and died.  Now I'm having second thoughts.

For one thing, I'm starting to doubt the feasibility of neck-cracking growth overseas.  China's projected growth is based on the migration from second tier towns into the main cities, creating megatropolises full of skyscrapers piped/wired with copper all over the place.  But of course, migration won't happen if there aren't jobs available.  And even though the world economy is getting a bit better (yes, it is!) I think that job growth has slowed enough to make a lot of these townies think twice about moving away for the city life... at least not within the previously projected timeframes, meaning the short term returns on FCX (or copper futures) could be diminished to the point where the opportunity costs of holding FCX at this point would become too high.  Additionally, where is all this money going to come from to fund the construction?  Is anyone going to buy the CMBSs to build skyscrapers in Shanghai right now?  Even if there is strong demand, I think financial constrictions will prolong this whole boom, turning it into a mild simmer.  Maybe a slow rolling boil.  A flash in the pan?  It must almost be lunchtime.  Sorry.

I also think that copper is useless if it gets too pricey.  Unlike gold, it doesn't have a value due to its shininess (or designation as the world currency; I still don't really understand that one).  Its value is strictly in its utility.  And though it's useful, it can be replaced by fiber for wiring and plastics for piping (which don't corrode).  This would create a price ceiling on copper wouldn't it?  A ceiling that can come down if manufacturing costs for its replacements go down. 

I have a feeling though that at least some of my assumptions above are faulty.  Can anybody educate me as to why I'm wrong?

6 Comments – Post Your Own

#1) On May 18, 2009 at 1:07 PM, dwot (54.27) wrote:

Copper was at about 80c earlier in the decade and it went to over $4.  When ever you get that kind of price change you end up with over production, and the bigger the increase, the longer it takes for over production to correct.

I have written about mining, http://makingsenseofmyworld.blogspot.com/.

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#2) On May 18, 2009 at 1:11 PM, OctoStalin (38.41) wrote:

Don't really see your logic, it will most likely be good investment indue  time. It takes years to open a mine and the credit markets are so tight and prices are so low no ones opening them, this is reducing supply in the long term. If the economy picks up(real economy not stocks) copper prices will pick up,if it dosn't your'll probabely still do okay.

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#3) On May 18, 2009 at 2:45 PM, Schmacko (63.13) wrote:

"I also think that copper is useless if it gets too pricey."

Copper brices tended to bounce between $3 and $4 from '06 to '08.  Copper right now is right around $2.  So if copper wasn't "too pricey" at $3+ not to long ago for a few years running you could make the argument that it won't be too pricey if it can get it's way back to the $2.5 - $3 range.  That would represent about a 25% to 50% increase in the metals current price and is still well on the low end of what it was trading at not too long ago.  You have to figure Freeport and other copper miners would see their shares rise aong with the price of the metal.

It all depends on your entry price though.  If you got into this stock at $110+ you might not be seeing that back soon or ever.  If you got in sub $20 you're doing very well for yourself.  I think FCX and other copper produces have more upside from here. 

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#4) On May 18, 2009 at 4:37 PM, TLStockPicks (91.15) wrote:

dwot and schmacko: Thanks for your replies.  What I'm really questioning is the price elasticity of copper... why/how exactly did it ever get to $4 bucks if there are cheaper (and arguably better) replacements out there?  Especially now, won't those real estate contractors that are still operating and constructing opt for the cheaper alternatives to copper to squeeze profits out that are otherwise being compressed on all sides?  And now that global growth projections have been toned down from the '06-'08 days (and assuming global urbanization was supposed to have been a major driver of copper demand), doesn't that mean looking at '06-'08 prices to project future prices is somewhat faulty? 

OctoStalin: maybe my comment above to dwot and schmacko clears up my logic?

dwot, I also couldn't find the specific entry that you're trying to point me to... could you throw me a line?

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#5) On May 18, 2009 at 4:51 PM, gdf55 (27.07) wrote:

One of your incorrect assumptions is that fiber can replace copper.  Not so for building construction.  Copper is the only reasonable material for in-building electrical wiring.  You can probably directly tie copper prices to the state of the home and commercial construction market.

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#6) On May 18, 2009 at 5:03 PM, TLStockPicks (91.15) wrote:

Thanks gdf55.  What about aluminum for electric?  That's 70 cents/lb now vs. 2 bucks for copper.  And yes it was dangerous-ish in the 70's, but hasn't technology found a way to insulate it better to prevent fires?

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