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Guest Post: How Is Dr. Copper Feeling?

Tyler Durden's picture




 

Via Casey Research,

How Is Dr. Copper Feeling?

By Louis James and Andrey Dashkov, Casey Research

 

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.

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.

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.

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.

 

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Mon, 07/09/2012 - 14:49 | 2599393 veyron
veyron's picture

Hows Ms Aluminum doing?

Mon, 07/09/2012 - 15:00 | 2599425 Leopold B. Scotch
Leopold B. Scotch's picture

I used to date her.  She was always appeared flexible but could be suprisingly firm for her weight.

Mon, 07/09/2012 - 15:03 | 2599448 I think I need ...
I think I need to buy a gun's picture

if you must screw with dr copper please go buy real copper at home depot not this freeport mcmoran shit where its going to cost alot getting it out of the ground in the future

Mon, 07/09/2012 - 15:21 | 2599539 Stock Tips Inve...
Stock Tips Investment's picture

I think this is a very important indicator of industrial activity worldwide. Clearly, a decrease in copper prices currently point to a reduction in industrial activity. Copper futures are down and the outlook in Europe paracen be the worst. The party is about to start.

Mon, 07/09/2012 - 15:18 | 2599509 Pool Shark
Pool Shark's picture

 

 

That's "Lady" Aluminum, to you.

You better anneal before me, or you might see me lose my temper...

 

 

 

Mon, 07/09/2012 - 14:54 | 2599413 Killtruck
Killtruck's picture

How is Cesium-san doing?

Mon, 07/09/2012 - 15:45 | 2599666 oddjob
oddjob's picture

Molly Beehum isn't so healthy.

Mon, 07/09/2012 - 14:58 | 2599421 Cognitive Dissonance
Cognitive Dissonance's picture

Doctor, doctor, give me the news.

http://www.youtube.com/watch?v=cUv-mZ7Q9I0&feature=related

Slightly off topic but.......here is the latest Yahoo Gold (and Treasury) hit piece. Some Yahoo pushing his book meme.

http://finance.yahoo.com/blogs/breakout/why-gold-treasuries-losing-safe-haven-status-181046099.html

Mon, 07/09/2012 - 14:58 | 2599422 Itch
Itch's picture

Does anyone know the copper contract tickers for the Bloomberg site? I wouldnt be supprised if they weren't in there though, they dont have spot gold or silver either...which is a little confusing.

Mon, 07/09/2012 - 15:05 | 2599463 AssFire
AssFire's picture

You know? I've got an itch.. those damned inflammed tissues.

Mon, 07/09/2012 - 15:11 | 2599485 TrumpXVI
TrumpXVI's picture

For some reason, Bloomberg doesn't seem to support the iPath sites.

Try Google:

iPath DJ-UBS Copper Total Return Sub-Index ETN

 


Mon, 07/09/2012 - 15:22 | 2599545 Itch
Itch's picture

Nah, it's for the bloomber maket monitor. Its a litttle app that lets you put lots of quotes on one screen, i have everything under the sun on it, apart from metals. I can get quotes from other sources, but its just a hassle, sometimes you forget to check them for long periods - i prefare to have them sitting in front of me everyday.

Mon, 07/09/2012 - 14:59 | 2599430 AssFire
AssFire's picture

Being gold is a by-product of copper and copper is on its ass.. that means even less gold being produced in the manner.

Mon, 07/09/2012 - 15:00 | 2599432 catch edge ghost
catch edge ghost's picture

A law recently enacted here makes you to wait for payment after you sell copper at recycling centers. They are calling it a deterrent to theft. I still call it price fixing.

Mon, 07/09/2012 - 15:05 | 2599461 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Dr Copper is feeling like it isn't a precious metal.

Poor copper :(

Mon, 07/09/2012 - 15:32 | 2599591 Cognitive Dissonance
Cognitive Dissonance's picture

My brother from down south stopped by the other day with a present for his older brother (me).

100 pounds of precious metal (lead) all ready to be cast into.....well, you know.

I love my brother. :)

Mon, 07/09/2012 - 15:05 | 2599464 Meesohaawnee
Meesohaawnee's picture

dont know how dr is doing but i just see this on the daily yahoo clownshow called the nesto idiot hour.. now its gold loosing the safe status. http://finance.yahoo.com/blogs/breakout/why-gold-treasuries-losing-safe-... i just comment over to show people what liars they are.

Mon, 07/09/2012 - 15:08 | 2599478 famousamos
famousamos's picture

With JP Morgan involved heavily in copper now via the London exchange, can anyone really say the price of copper has anything to do with anything? or just another manipulated BS indicator?

 

Mon, 07/09/2012 - 20:36 | 2600629 dark pools of soros
dark pools of soros's picture

didnt china buy that exchange?

Mon, 07/09/2012 - 15:54 | 2599706 Tao 4 the Show
Tao 4 the Show's picture

Copper chart looks like it could be setting up a reverse H&S, so who knows. Enough printing would make the price rise even with activity low. Time will tell.

Mon, 07/09/2012 - 15:56 | 2599720 Jack Sheet
Jack Sheet's picture

Is a bonded warehouse where they make bondage videos?

Mon, 07/09/2012 - 15:59 | 2599732 Cognitive Dissonance
Cognitive Dissonance's picture

Today's safe word is "Copper".

Mon, 07/09/2012 - 17:48 | 2600105 q99x2
q99x2's picture

They could use it for pennies and lower the price of everything.

Mon, 07/09/2012 - 20:38 | 2600633 dark pools of soros
dark pools of soros's picture

arent pennies made of plexiglass these days?

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