The Copper Shock
Since the force of supply and demand that drives the global economy never fundamentally changes, some companies need to give the global economy a bit of a push in order to make certain that their products remain viable. Should Wal-Mart decide tomorrow that they'll stop carrying rubber duckies, for instance, you can be certain that the price of rubber duckies on the New York Stock Exchange will increase so sharply it'll make the headlines at CNBC. Such is the decision in the hands of Glencore, one of the largest mining companies on planet Earth and a frequent subject of news in the metals world. With their stock prices having fallen by nearly 60% in the last four months alone, Glencore has had to take a drastic step to bring their products back into the realm of profitability: mothballing their copper mines in Africa and South America to drive prices back up. That could hardly be better news to the ears of copper investors.
The base metals market looked just about as grim in 2003 as it does today. Following the collapse of the dot-com economy, American constructon spending fell into a lull, a trend mirrored in the EU just before China's economy exploded out of the gate. Copper prices hit eight-year lows of less than seventy-five cents per pound, forcing the Chilean copper mining company Codelco to take precautions by stockpiling a quarter of a million tons of copper (worth approximately $120 million) in order to salvage their sole product. The gambit worked rather fantastically for Codelco, as it not only created a huge supply shortage around the globe but kick-started a decades-long bull market that saw a number of miners and investors alike grow rich off the back of the base metal. Since the Chilean government owns Codelco outright, the benefits to Chile's economy, in which a full 50% of all exports derive from copper, proved rather beneficial. GDP growth roared to six percent by 2004, making it one of the best South American performers prior to the global financial recession. Should the world react with the same skittishness to Glencore's decision, it'll easily be the biggest copper news of the past five years.
The numbers involved in Glencore's decision seem large for a good reason: the company outright owns about ten percent of all of the copper mined each year on planet Earth. When they say they want to cut output by about half a million tons, as such, they hold a full two percent of all global copper output in the palm of their hands. The company intends to do so by shuttering mines in the Central African Republic, in Zambia, in the Phillipines, and in Canada over the course of the next 18 months. In addition to concerns over the current state of the copper market -- while poor, nowhere near as poor as tin, which is flirting with 50% losses over the past 52 weeks -- the company needs to tackle their $30 billion in debt, a figure that represents a full one quarter of their yearly revenue and is about as much as the total budget of states like Arizona and Pennsylvania. While Glencore's stock prices grew by seven percent the day of the announcement, that's just a drop in the bucket now that it trades below one pound (about a dollar and a half) per share while very real risk of a major credit rating downgrade loom. Given the state of the market and the state of the company, Glencore has to take a very drastic step forward to remain a viable player in the metals industry.
Penny For Your Thoughts
Will the Glencore move do to copper what the 2003 Codelco shortage did? While the easy answer is yes -- an emphatic yes -- the degree to which copper prices will be affected seems more uncertain. During 2014, analysts claimed that output fell by about one million tons under expected output due to strikes, weather, and electricity shortages through the copper belt of Africa, yet the shortage did nothing to alleviate the slow and steady drop in prices. What these analysts haven't taken into account, however, is that the same hazards have struck on the opposite side of the world this year. The recent 8.3 magnitude earthquake off the South American coast coast (the famous San Francisco earthquake hit only a 7.8) left just five dead but heaped a giant pile of ruin onto the Chilean and Argentinian infrastructure needed to get copper out of the ground and onto container ships. Both Codelco and rival copper miner Antofagasta evacuated and temporarily shut down their largest mines in the region near Santiago. The long-term impact of the earthquake remains to be seen, but there's no doubt it'll touch the copper market and give prices a leg up.
- The Takeaway: the Glencore news represents a fantastic investment engine for copper. Growth in the metal had previously been much riskier than it appears on today's market, with a certainty for major shortages comes 2016. Portfolios that stock up on copper will enjoy the cusp of a recovery session that could quite realistically last the better part of a decade. The gains may not come as fast as those of 2003, but they'll certainly come as emerging markets require more and more copper with less and less available.
- In addition to holding the metal commodity outright, investors can hedge that longing copper over the next twelve to eighteen months will prove a very good decision. Investors need to think as long-term as they are comfortable with on the investment given that copper will likely dip further until the mines shutter, then begin an upward trajectory by the end of the year.