Copper has been the clear winner amongst all industrial commodities over the past year.
Since January 2009, copper prices appreciated 132% in comparison to gold and crude oil, each of which registered gains of only 28%. The flagship CCI Commodity Index, which tracks a broad range of commodities including energy, metals and agricultural produce, appreciated only 30%.
Riding this wave, stocks of copper producers
Freeport-McMoran Copper & Gold
, gained 189%
surged 568% ,
jumped 115%, and
advanced 64%, during this period.
Copper is currently trading at $7,405 a ton for spot delivery on the London Metal Exchange, having corrected 3% since the peak of $7,630 at the beginning of this year. The outlook is somewhat mixed with some analysts forecasting a further appreciation in prices and others predicting consolidation at current levels.
Nevertheless, from a producer's perspective, the average prices of copper will still remain about 35% higher than those witnessed during 2009, according to analysts polled by Bloomberg. This implies that earnings of copper producers will continue to register significant double-digit growth rates at least for the first couple of quarters this year.
Freeport-McMoran is most highly leveraged to the trend in copper prices. The company plans to increase its exploration spending to $100 million this year. Its shares are trading at relatively inexpensive 13.5-times forward earnings.
Copper producers believe that global copper mining will not be able to keep pace even if demand grows at a moderate pace. With average copper prices during 2010 set to be much higher than 2009, producers are clearly optimistic. Producers have committed significant investments towards expanding capacity in the near-term and expect strong production growth this year.
The management of Teck Resources expects copper production to increase 40% from announced projects in the near- to medium-term through 2012. Announcing strong fourth quarter results, the company guided to copper production growth of 10% this year.
Rio Tinto signed an investment agreement with the government of Mongolia for the development of the Oyu Tolgoi copper-gold complex in Mongolia's South Gobi region. Production is expected to commence in 2013 with a five-year ramp up to the full expected volume of 450,000 tons per year.
Southern Copper expects that emerging economies and increasing consumption led by China will support current copper prices during 2010, according to CFO Genaro Guerrero who gave an upbeat forecast during the company's fourth quarter earnings conference call. It forecast average copper price realization of $3.25/lb during 2010, 38% higher than the average $2.35/lb recorded in 2009. The company has committed investments of $2.8 billion over the next three years for expansion compared to capital expenditure worth $439 million during 2009.
Meanwhile in China, three copper product firms are looking to jointly build an 800,000 ton-a-year copper smelter in the eastern port city of Lianyungang in Jiangsu province. With total investments of 12 billion Yuan ($ 1.8 billion), the first phase will add 400,000 tons of refined copper capacity, implying an 8% increase in China's smelting capacity by 2013.
The appreciation in copper prices has been almost entirely attributed to China's stockpiling strategy. Evidence is seen in the Shanghai Futures Exchange, where inventories have gone up sharply since the second half of 2009. Copper inventories in warehouses monitored by the SHFE stood at 114,302 tons last week, the highest level since April 2004.
There have been mixed signals from the market on the direction of copper prices this year. While some market experts believe that prices may consolidate at current levels, others opine there is further scope for appreciation.
Most analysts however, hold a contrarian view citing the arbitrage window between the Shanghai and London markets, which continues to open wider. Prices per ton of copper in Shanghai are about $146 more than those in London after accounting for China's 17% value-added tax, according to data compiled by Bloomberg. Analysts feel Chinese buyers will continue to stockpile copper as long as the arbitrage remains favorable.
Adding to this is Beijing's strategic decision to stockpile metals as an alternative to foreign bonds.
Moreover, the pace of upward revision of analyst price targets is noteworthy. Recently,
raised its copper forecast to $3.8/lb for 2010 from the earlier $3.3/lb. The price forecast is 63% higher than the 2009 average of $2.33/lb for copper cathode on the London Metal Exchange. The bank expects demand to grow over 10% to 19 million tons during 2010, resulting in a global supply deficit of 600,000 tons.
Analysts at Standard Chartered recently revised their 2010 average copper price forecasts upward by 14.6% to US$7,675 per ton from the previous forecast of US$6,700.