How Is Dr. Copper Feeling?

By: Louis James & Andrey Dashkov | Fri, Jul 6, 2012
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Copper is sometimes referred to as "Dr. Copper," because the metal is used in so many industrial applications and is essential for many different sectors of the economy, from infrastructure to housing to consumer electronics. That usually makes its price action a good indicator of the state of the global economy.

The chart below illustrates the degree to which copper follows economic health – as opposed to gold, which is a traditionally a contra-cyclical commodity. Have a look.

Gold vs. Copper and S&P 500

This illustration paints a convincing picture: over the past five years, copper (and the economy) stagnated, while gold was on a steady uptrend. No surprises here: gold has always been a reliable hedge against economic and financial turmoil.

In 2012, copper demand started out quite strong. The International Copper Study Group (ICSG) published Q112 numbers that showed a healthy uptrend in demand: year-on-year, apparent usage grew by 9%, while refined production increased by 4%. (This is defined by ICSG as refined production + refined imports – refined exports + refined beginning stocks – ending stocks.)

China, responsible for about 40% of global copper demand, almost doubled its net imports, with a 99% annual growth rate in Q112. This does not mean, however, that the metal was used right away by industry: ICSG indicates that high import levels were accompanied by growing inventories in bonded warehouses.

This will lower demand in the near term. And it's not just China: other major sources of demand were largely stagnant in the first quarter, with the US growing by only 1%, European demand decreasing by 9%, and Japanese down by 6%.

Some analysts expect the European market to be "dead" for the rest of this year, due to the lack of trading volumes. Chinese demand is projected to soften, and its output of copper products is estimated to grow by 10-15% year-on-year. That may seem robust, but it was 18% last year, according to Beijing Antaike, a state-run metals research company. As with many official numbers coming out of China, we take these with a grain of salt, and thus expect output to be even lower than projected.

Copper Producers Follow the Metal's Movement

On average, the stocks of these copper companies have dropped about 35% since the end of June 2011. The stocks are more volatile than the metal itself, and in a weak economy that means rebounds are unlikely.

But are they still profitable? Yes, they are. Despite the global economic uncertainty and the volatility in the copper price, copper producers have had strong margins since Q310.

Producers' Margins Follow Copper Price

In the past three years, the net income margin of our 20 copper producers remained, for the most part, above zero. The chart shows the post-2008 growth very clearly, as well as the weakness in the second half of 2011. You can also see that the first quarter this year was a good one for copper producers, though again the results for Q2 may be disappointing due to economic uncertainties.

This pattern is exactly in line with our expectations, and it's the reason why we have not only stayed away from most copper plays the last few years, but other industrial metals as well. It's not that we only like gold and silver, but that our bearish near-term economic forecasts are bearish for Dr. Copper as well. So we've stayed away, even from well-run, profitable companies, opting instead to put them on our shopping list for when the economic situation looks so dire that they become good contrarian picks.

We are not there yet, so we still view the precious metals as the best bets for the foreseeable future.

 


Of course, not just any precious metal producer is a "best bet" – and with the current volatility, very careful due diligence is required. One of the best indicators of a stock poised to produce stellar gains is its takeover potential – something savvy analysts can sniff out and use to good advantage.

 


 

Louis James

Author: Louis James

Louis James
Senior Editor Metals Division
Casey Research, LLC.

Louis James

Louis James' background in physics, economics, and technical writing prepared him well for his role as senior editor of the International Speculator and Casey Investment Alert. Like Doug Casey, Louis constantly travels the world, visiting highly prospective geological targets, grilling management and company geologists, and interviewing natives in a variety of languages to find out what they really think (he's fluent in French and Spanish, and speaks a little German and Russian).

Whether it's days of back-to-back meetings with mining company executives in Vancouver, pounding on rocks in the Democratic Republic of the Congo, examining drill core in Argentina, or eating food with names he can't pronounce with local miners in China, Louis is constantly looking for the next double-your-money winner.

He evaluates dozens of companies every month, conducts due diligence of only the best, and then compares notes with Doug in order to bring only those most likely to provide rapid high returns to our subscribers' attention. Louis also reads all the press releases, financial statements, and an enormous quantity of related information to keep track of all of our mineral companies and has become something of a walking database on same.

Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained herein is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed herein are those of the publisher and are subject to change without notice. The information herein may become outdated and there is no obligation to update any such information. Doug Casey, entities in which he has an interest, employees, officers, family, and associates may from time to time have positions in the securities or commodities covered in these publications. Corporate policies are in effect that attempt to avoid potential conflicts of interest, and resolve conflicts of interest that do arise in a timely fashion. No portion of this web site may be extracted or reproduced without permission of the publisher.

Copyright © 2006-2013 Casey Research, LLC.

Andrey Dashkov

Author: Andrey Dashkov

Andrey Dashkov
Research Analyst
Casey Research, LLC.

Andrey Dashkov

Andrey Dashkov, a native Russian, studies international finance and banking at Belarus State Economics University. In 2007, he met Louis James who was impressed with his enthusiasm and diligent research skills. Since then, Andrey has been researching global inflation, base metal and stock data, as well as company news for Casey Research. Thanks to his language skills, Andrey is an invaluable member of the team when it comes to looking into data from Russia, one of the world's major resource explorers.

Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained herein is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed herein are those of the publisher and are subject to change without notice. The information herein may become outdated and there is no obligation to update any such information. Doug Casey, entities in which he has an interest, employees, officers, family, and associates may from time to time have positions in the securities or commodities covered in these publications. Corporate policies are in effect that attempt to avoid potential conflicts of interest, and resolve conflicts of interest that do arise in a timely fashion. No portion of this web site may be extracted or reproduced without permission of the publisher.

Copyright © 2010-2012 Casey Research, LLC.

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TRUE MONEY SUPPLY

Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
austrian-money-supply/