The copper market is out of whack today.
Markets move for lots of reasons. Fundamentals of supply and demand are the long-term forces. But in the short-term, traders move markets on emotion.
The copper market is an excellent example. Today, it’s in deficit. That means there is more demand than supply. And that condition will continue for the next few years.
Giant European bank Société Générale forecast a 200,000 metric ton deficit in 2018, rising to a 300,000 metric ton deficit in 2019.
Giant copper miner Teck Resources Ltd. (NYSE: TECK) projects 1.8 million metric tons of new supply by 2027. But the market needs at least 4.4 million metric tons to meet demand.
In this kind of market, prices should be going up. But as you can see from the chart below, they fell in 2018:
The reason for the slump in 2018?
Fear.
Trade War Worries
Traders are afraid that the trade war between the U.S. and China will impact copper demand down the road. That would bring the market back into balance … in theory.
But that’s not what the models show.
Bloomberg Intelligence, the research arm of the news company, described 2020-2021 as a “near-worst-case scenario.” That’s because many things have to go right to avoid a huge copper shortage.
As it said in its June report:
Our supply estimates include some projects that don’t have a shovel in the ground but are likely to receive board approval within the next year, not to mention a smooth transition and ramp-up of the underground portion at Grasberg. If any of these get delayed, it would paint an extremely bullish backdrop.
Here’s the thing with mine construction: It never goes perfectly well.
I can count the number of mines I’ve seen come in on time with one hand.
The likelihood for a project the size of Grasberg’s underground, Freeport-McMoRan Inc. (NYSE: FCX)’s giant Indonesian gold and copper mine, being ready on time is almost zero.
It is nearly impossible to build a meaningful mine of any sort in two years.
That’s why copper is the next huge bull market in metals.
The Copper Market’s Troubles
To understand where we are now, we need to look back a few years.
This situation took 15 years to set up. It started with a major bull market.
Copper prices soared from $0.70 per pound in 2003 to over $4.60 per pound by 2011. Mining companies dumped enormous amounts of cash into low-grade projects.
The mining companies assumed that high copper prices would stay.
Obviously, they were wrong.
All the metals fell into a five-year bear market in 2011. Copper prices slumped below $2 per pound by 2016. When the price of a commodity falls more than 50%, producers get pinched.
Many small and mid-tier copper companies went bankrupt.
The industry contracted. Companies walked away from hundreds of millions of dollars in exploration and development investments. Exploration stopped. The industry limited development to just a handful of projects.
The Next Big Thing
Fast-forward to today. There is a huge push for electric-power projects.
Solar and wind power are growing at enormous rates. Electric cars are “the next big thing.”
All those things are more copper-intensive than the alternatives.
Over the past five years, demand for copper wire in China, where all this stuff gets made, rose 50%.
Not even a trillion dollars in tariffs can derail this trend.
China makes the air conditioners, batteries, wind turbines and refrigerators for the world. Demand is soaring while supply is dwindling.
Investors looking for the next big opportunity should focus on copper miners right now. The bull market is coming.
Good investing,
Matt Badiali
Editor, Real Wealth Strategist