Top 5 copper price forecasts for 2012

Get an idea of how much growth analysts expect to see in China and around the world in 2012 by taking a look at their copper price predictions. Here are five of our favorites.

Early in December 2011, copper prices started rising, and they’ve shown little sign of slowing that climb since the start of the year. Over the past two months copper prices have risen 11 percent from 3.40 a pound to more than 3.80 a pound.

Since copper is so integral to the expansion the global economy, economic growth means higher copper prices. The numbers are skewed toward China, though. Last year, the PRC alone accounted for 40 percent of global refined copper demand. We can get an idea of just how much growth analysts expect to see in China and around the world in 2012 by taking a look at their copper price predictions for the year. Here are five of them:

1) Average of $3.85 a pound. Cochilco, the Chilean government’s copper commission, raised their copper forecasts last week from $3.50 a pound to a 2012 average of $3.85 a pound. Cochilco cited increased demand out of China as the driver for the move.

2) Up to $9,000/mt. Standard Bank is predicting global copper consumption will rise at a relatively mild 1.2 percent in 2012. That means “demand for copper is unlikely to be strong enough to support prices above $9,000/mt for most of the year.” That’s roughly $4.08 per pound. “We think copper will average $7,700 with good support when we go below $7,000,” Walter de Wet, head of commodities at Standard Bank, told ResourceInvestor.

3) Copper north of $9,000 a tonne. In contrast to predictions from Standard Bank, Barclays Capital analysts predict copper prices will trade “consistently above $9,000 a tonne by the second half of the year” (per ResourceInvestor).

4) $7,350/ton. Early in January 2012, Deutsche Bank AG reduced their 2012 forecast for copper by 18.8% to $7,350/ton. “We expect that near-term deflationary fears from the worsening economic picture in Europe and intensifying hard landing fears in China may continue to depress pricing for the base metals complex,” the bank said at the time.

5) $10,000-a-ton. Strong copper price performance at the start of 2012 had some investors speculating that the red metal could hit $10,000 a ton by the end of the year. “Six months from now the market may be genuinely tight, but it is definitely not genuinely tight today and so I would treat calls of $10,000 a ton with a pinch of salt,” BNP Paribas strategist Stephen Briggs told the Wall Street Journal.

Photo by cobrasoft.

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Copper will likely keep falling until demand in China picks up. When it does, we might just see copper at $5 a pound.

After hitting a record high of $4.62 a pound on Feb. 14, copper prices have fallen off nearly 9 percent to close at $4.23 yesterday. Analysts have largely shrugged off the decline as temporary, though, convinced that China’s on the verge of more buying – even in the face of dwindling global supplies.

“Taking the risk of contagion in the MENA (Middle East/North Africa) region out of the equation, then copper has a very good chance of rising a lot higher,” Martin Squires, executive director of J.P. Morgan Securities, tells the Wall Street Journal. “I don’t think the industry is carrying a lot of stock, global PMIs are robust and in some places the best they’ve been in years. Could copper see a new high? Most certainly.”

China, in particular, appears poised to start buying more of the red metal after scaling back imports towards the end of 2010. The country sold off its contracted and warehoused metal early this year as prices spiked. Now, they’ll look to replenish their stores even as analysts like Squires predict a supply deficit of between 500,000 and 600,000 tons this year.

In a recent interview with Bloomberg, Lundin Mining Corp. Chairman Lukas Lundin argues that the metal is in the midst of a 10-year supercycle.

“I’m very bullish on the copper price because we can’t meet demand,” he says. “If the economy stays strong, mining is going to be unbelievable for the next five to 10 years minimum.”

Don’t expect the 10-year bull market to rise in a straight line, though. Analysts say China will start importing more copper soon, but that buying hasn’t happened yet. Customs numbers released yesterday showed China’s copper purchases dropped 35 percent in February – the biggest decline in more than two years. Not coincidentally, copper spiked to all-time record highs in February, which played a big role in the decline in demand.

“I think Chinese participants are still waiting for more declines,” Zhuo Guiqiu, an analyst with Minmetals Futures, told the Journal. “We saw a lot of Chinese buying when LME copper was around $8,000/ton, so I guess many people are still waiting.”

The moral? Copper will likely keep falling until demand in China picks up. When it does, we might just see copper at $5 a pound. U.S. Global Investors Inc., which manages $3 billion in San Antonio, said in December that copper would reach $5 a pound within 24 months. We’ve got 21 months to go.

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A declining dollar, inflationary fears and growing silver consumption in emerging economies helps explain silver’s out-performance of both gold and copper, and it’s a trend that’s likely to continue.

Silver inhabits the shimmery space somewhere between a precious metal (like gold) and an industrial metal (like copper). By straddling both spaces, it offers unique advantages that have helped it outperform both gold and copper for the past eight years.

“If the world were going to hell in a hand-basket, then I would expect gold to outperform silver,” writes Peter Schiff at SilverSeek.

That hasn’t been the case, though, and Schiff believes the cause is more insidious than most investors realize. Namely, it’s indicative of a shift of economic power from the developed world to the emerging world. While the U.S., Japanese and European economies struggle to regain their footing, China and India are rapidly growing.

That’s the key to silver’s out-performance in the precious and industrial metals markets. Western investors are buying silver to hedge against a falling dollar while emerging economies are consuming more of the metal as jewelry and for use in high-tech goodies like iPhones, batteries, medical equipment and solar panels. The net effect is a growing gap between silver demand and mine production.

With silver demand at roughly 890 million ounces a year, global mine output is closer to 720 million ounces a year. That disparity alone puts upward pressure on prices. Throw in a declining dollar, inflationary fears and growing silver consumption in emerging economies and you’ve got a playbook that explains the metal’s out-performance of both gold and copper.

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Three reasons to invest in Xstrata PLC (PINK:XSRAF)

Xstrata (PINK:XSRAF) shares trade at a 10 percent discount to the company’s coal and copper assets alone. If that isn’t enough, here are three more reasons to consider adding Xstrata to your portfolio.

The world’s largest producer of thermal coal and a world-class copper miner, Xstrata’s (PINK:XSRAF) earnings spiked 86 percent during fiscal year 2010. Metals analyst John Tumazos of John Tumazos Very Independent Research tells Barron’s the company’s significantly under-valued compared to its peers. Indeed, shares trade at a 10 percent discount to Xstrata’s coal and copper assets alone. If that isn’t enough, here are three more reasons to consider adding Xstrata to your portfolio:

1) Leader of the pack. Xstrata has “the greatest growth upside” of any of the large-cap miners, according to analysts at Credit Suisse. Copper and coal volumes are expected to surge at an average of 50 percent over the next five years Barron’s reports. That’s good news as prices for both commodities have surged toward record levels this year. Xstrata’s also got significant nickel, zinc and alloy deposits including primary vanadium and platinum group metals. As a bonus, the company provides technology services for large-cap miners including Anglo Platinum Limited (PINK:AGPPY) and Goldcorp Inc. (NYSE:GG).

2) Rain, rain go away. Flooding in Australia has temporarily halted output at the company’s Ulan mine, which has an annual output capacity of 4 million tonnes of thermal coal, according to The Australian. The flooding has also affected coal output at BHP Billiton, Rio Tinto, Peabody Energy and Anglo American, stoking coal prices around the world. Xstrata’s strong balance sheet should help the company get the mine back online quickly, and Xstrata claims the shutdown will have little effect on profits.

3) Dividends are good. Xstrata recently returned its dividend to pre-crisis levels with a year-end payout of 20 cents. It was a move that was significantly higher than expected, Paul Galloway, analyst at Sanford Bernstein, tells the Financial Post. If copper and coal prices keep climbing, expect even better dividends in the years to come.

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Future looks bright for Taseko Mines Ltd. (AMEX:TGB)

After a deep sell-off in November, things are definitely looking better for Taseko Mines Limited (AMEX:TGB). I’m kicking myself for not buying in.

I’ve been kicking myself for not buying shares in Taseko Mines Limited (AMEX:TGB) after a deep sell-off in November. Investors punished Taseko shares after the Canadian government rejected plans to develop TGB’s massive Prosperity gold and copper deposit in British Columbia.

Taseko shares bounced around for a month on the bad news. Since then they’ve been on a tear, rising more than 40 percent over the past three months in the face of surging copper demand and, most recently, on plans for expansion at Gibraltar. Things are definitely looking better for TGB. Here are a few recent developments that might make the stock a great addition to your portfolio:

  • Gibraltar’s getting bigger. Pending approval by partners, Taseko announced plans earlier this week for a $325 million expansion at Gibraltar – a large copper and molybdenum mine in British Columbia. A new concentrator at the site should grow copper production by 60 million pounds a year to 180 million pounds a year by Q4 in 2012, according to MiningWeekly.com. Taseko’s also budgeting a new molybdenum recovery facility that will boost production in the steel alloy ingredient by 1 million pounds a year.
  • Price target gets a boost. On the heels of the announcement that Taseko’s expanding its Gibraltar mine, Canaccord Genuity raised its price target on the stock from C$7.00 to C$7.75 yesterday. The Globe and Mail reports that “analyst Orest Wowkodaw (at Canaccord) likes the company’s strong balance sheet, attractive relative valuation and significant leverage to the red metal.”
  • Prosperity could see daylight yet. The contentious development of Taseko’s Prosperity mine has some powerful political allies that could help the company ultimately get the mine approved. The B.C. government, for instance, pledged its support, and a candidate for B.C. Premier, Christy Clark has moved the mine to the top of her agenda, according to The Globe and Mail.
    “I think the Prosperity Mine needs to move ahead, not just for the thousands of jobs that would be created over the years in the Williams Lake area, but as a signal to investors across the world that British Columbia is open for investment, and if you want to tell people not to come the Prosperity Mine is a pretty big signpost telling them we don’t really want investment here,” Clark told the paper early this month. “We have to change that.”

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Copper supply in 2011 expected to fall short by 500K tons

The looming threat of a supply crunch has helped push copper prices to a record levels above $10,000 per ton, and those levels are probably here to stay.

Expect a worldwide deficit of about 500,000 tons of copper this year, according to The Australian. The looming threat of a supply crunch has helped push copper prices to a record levels above $10,000 per ton.

Major copper mining companies have benefited handsomely from the surge in prices. Xstrata PLC (PINK:XSRAF), one of the world’s top four biggest mining companies, saw its revenue rise by 34 percent last year on the strength of rising commodity prices, the company reported Tuesday. Profits jumped 700 percent after earnings were impacted by restructuring in 2009. Analysts expect copper and iron ore miner Anglo American PLC (PINK:AAUKY), which will announce its full-year earnings on Feb. 18, to show equally impressive numbers with Thomson Reuters calling for a 100 percent increase in profits in 2010.

Still, some writers have cautioned that copper’s price gains aren’t so much a result of incredible demand as they are the product of shrinking supply. That could lead traders to get too bullish on commodities since copper’s price movements are lauded for deducing the world’s economic health. The red metal’s supposedly so good at indicating the health of economies that its even got its own nickname: Dr. Copper.

“Even if global economic growth was modest, copper prices would be high, as we saw in late 2009 and early 2010,” writes Javier Blas at FT.com. Indeed, copper output at the world’s largest listed copper miner Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) fell 5 percent last year and Xstrata cautions that onerous regulation and a lack of skilled labor and engineers is making copper production increasingly difficult.

The net result? High copper prices are here to stay, and this year’s 500,000 ton shortfall might not look so bad compared to what’s coming in the future.

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Copper prices trends point to $5 copper in 2011 or 2012

Copper miners are struggling to keep up with demand and that has some forecasting copper at $5 per pound by the end of the year.

After tripling in price since 2008, copper hit $10,000 per metric ton on Friday – a new record high. It could be the surest evidence yet that we’re actually headed for a real global recovery. Demand for the metal is surging in China and India as both countries expand their infrastructures and copper miners are struggling to keep up.

Constrained supplies are here to stay for the “foreseeable future,” according to Freeport McMoRan Copper & Gold Inc. (NYSE:FCX) CFO Kathleen Quirk. That’s largely thanks to China’s ballooning demand as the country adds power lines, bridges and other infrastructure.

China remains the key player in copper prices as it accounts for 35 percent of worldwide copper demand, Cary Pinkowski, chairman of CP Capital Group, tells MarketWatch. Contrast that with Europe, Japan and the U.S., which combined account for just 30 percent of worldwide demand.

Weiss Research analyst Sean Brodrick targets copper at $5 per pound by the end of the year or early in 2012. That would tack a 10 percent gain onto current copper prices. Over the past 30 days alone, copper has risen 6 percent.

Dr. Copper

Copper’s often lauded for predicting changes in the global economy. Since its supply and demand isn’t heavily tainted by futures and stocks, abrupt prices changes are believed to indicate inflection points for the global economy (i.e. the recent rise in prices bodes well for future growth around the world – or at least in China). It’s such a well-known phenomenon that investors regularly refer to the red metal as Dr. Copper, “the metal with a PhD in economics.”

Still, there are fears that the recent launch of a physical copper ETP from ETF Securities (Ticker: PHCU.L) could be artificially affecting prices. Launched on Dec. 10, 2010, the ETP holds 2,070 tons of copper and counting. That’s copper supply that could otherwise be in the hands of construction crews that actually need it. Future copper ETFs planned by BlackRock and JP Morgan will further hamper Dr. Copper’s ability to prognosticate, but for now, I’m listening to him.

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World copper consumption supply and demand in 2011

How much copper does the world consume each year? And where can we expect prices to go in 2011?

Worldwide copper consumption

After a shortfall of some 436,000 tons of copper last year, investors are bullish on the red metal in 2011. But just how much copper does the world consume? The short answer is roughly 20 million tons a year according to the World Bureau of Metal Statistics.

Global demand for copper grew by 8 percent during the first nine months of 2010 (per Reuters), and that’s got some investors calling for copper to rise above $11,000 per ton this year.

Estimates for global copper shortfalls in the coming years range from 380,000 tons to 500,000 tonnes in 2011 and Standard Bank predicts a deficit of 562,000 tonnes in 2012, according to Business-standard.com.

Investor demand from physical copper ETFs could add even more pressure to an already strained market. That’s good news for investors and miners, but it could also drive up commodity prices in the midst of a fragile economic recovery.

Still, the ingredients seem ripe for a bubble in copper prices. There’s growing demand, looming inflation, a projected shortfall in supply and the emergence of physical copper ETFs. It’ll be interesting to see if those factors have the red metal shining brighter than its flashier cousins this year.

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Physical copper ETFs could push prices over $10,000 per ton

The iPath Copper ETN (NYSE:JJC) already offers exposure to copper in the form of futures contracts, but physical copper ETFs could play a larger role in copper prices around the world.

Physical copper ETFs could be coming soon

If you’ve been reading this blog for any amount of time, you’d know I’m bullish on commodities – especially the ones that aren’t quite as sexy as gold and silver. Commodities like coal, copper and oil are so integral to expanding economies that countries like China are limiting domestic exports and gobbling up supplies to build stockpiles around the world.

Construction requires copper, and even the idea of physical copper ETFs has created something of a microstorm in the metals markets. JPMorgan and BlackRock iShares have started moving forward with their own individual proposals to launch ETFs that would store and warehouse physical copper.

The more money the copper funds control, the more copper the funds would be stuffing in their warehouses. Obviously, that would take copper off the market that could otherwise be used for meaningful construction projects.

“That physical ETF working and being successful – that’s the difference between $8,500 copper and $10,000 copper,” Max Layton, a metals analyst at Macquarie, tells Jack Farchy of the Financial Times.

If the funds grow large enough, investors could see a case of the tail wagging the dog. Would it be the fund driving up copper prices, or rising copper prices driving investors to dump more money into the ETF? It’s a line that hasn’t fully been tested.

There is one copper ETN that already offers exposure to copper in the form of futures contracts. The iPath Dow Jones-UBS Copper Subindex Total Return ETN (NYSE:JJC), though, has a relatively small market cap at $173 million. Still, it’s up 16 percent over the past three months, and if JPMorgan and BlackRock iShares are successful in their bids to create physical copper ETFs, I can see JJC – and the price of copper – continuing its upward climb.

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How to Invest in Copper

Copper isn’t as glitzy or glamorous as gold or silver, but in many ways it feels safer, but how does one invest in copper? Here’s a short list of copper stocks to consider.

Copper has surged from just under $3 per pound to just shy of $4 a pound over the past calendar year. That’s a gain of 33 percent, and that means copper has risen faster than the price of gold over the same period of time. There are a number of real and perceived reasons for the rise, but chief among them has to be the looming threat of inflation. If the dollar continues to fall, the true cost of copper will rise relative to the fall in the dollar. That – coupled with growth in India and China – has investors pouring into the conductive metal ore.

Copper isn’t as glitzy or glamorous as gold or silver, but in many ways it feels safer. Since copper is regularly used in electronics, it’s consumption per person (particularly in the developed world) has been on the rise for decades. So how does one invest in copper?

The simplest way, of course, is through the purchase of copper mining stocks or ETFs. Here’s a quick primer on some of the players in the industry a jumping off point for further research:

1) Try a copper ETN. Want to get some exposure to copper without investing in a single company? Try the iPath Dow Jones-UBS Copper Subindex Total Return ETN (NYSE:JJC). This copper ETN invests in copper futures contracts traded on the COMEX. JJC is up 30.7 percent over the past year with most of that rise (23 percent) taking past over the past three months.

2) Invest in specific mining stocks. ETNs and ETFs offer a measure of protection against the extreme price volatility inherent in investing in a single copper company, but the promise of large gains is also limited. Investing in a moderate-growth copper mine could outstrip performance in the iPath Copper ETN (JJC). Here’s a look at a few copper stocks of note:

  • Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX): A mature and stable company with a market cap of $50+ billion, FCX mines copper and gold
  • Rio Tinto (NYSE:RIO): Another large company with a diverse portfolio of mines, Rio Tinto extracts aluminum, diamonds, coal, even uranium and gold in addition to copper
  • Southern Copper Corporation (NYSE:SCCO): A focused copper miner, shares in SCCO have surged 20 percent in the past month
  • Augusta Resource Corp. (AMEX:AZC): A smaller, more speculative play on copper and silver, AZC owns the Rosemont copper property in Arizona. The stock’s up just 1 percent over the past month, but I wouldn’t be surprised to see it pop if the price of copper continues to rise
  • Taseko Mines Limited (AMEX:TGB): A riskier copper play, TGB has see-sawed in price as the Canadian government green-lights then red-lights TGB’s fabled Prosperity mine. The latest news is TGB won’t be allowed to mine the Canadian Prosperity mine, but I’m not so sure of that. If the company does get the green light, this stock will be back over $6 in a day or two. Keep an eye on it for further developments.

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