The words of someone much smarter than me.
"Unlike the situation in the oil and natural gas markets, the aboveground supply of physical copper remains quite low relative to demand. The short-term risk in the copper market isn't that a moderately-tight supply situation will suddenly turn into a supply glut, but that the price will plunge in response to a mass exodus from commodity-related funds by the investors who piled into these funds over the past couple of years. Even if the commercial demand for copper remained at its current levels the copper price could quickly drop to $2.50, or even to $2.00, if the breaking of some technical support levels caused the money managers who have channeled more than $200B into commodity-linked funds to seriously question the "commodity super-cycle" thesis. On the positive side of the ledger, unless such a decline was accompanied by a significant reduction in demand it would be short-lived. It would, we think, create a wonderful short-term buying opportunity for investors in mining stocks and a good opportunity for 'hedged' copper producers such as Phelps Dodge to exit their short positions.
The longer-term risk is that the combination of a recovery in the US$ and a substantial slowdown in global growth will create a bearish set of supply/demand circumstances for copper and the other industrial metals. We expect that the copper price will exceed this year's high before the end of the decade, but, as appears to be the case with oil, it's quite possible that the industrial metals will experience cyclical bear markets over the coming 6-12 months.
In any case, regardless of what happens over the next several months it's important for investors to understand that the long-term bull markets in metals and the stocks of metal producers did not end earlier this year. Long-term bull markets don't end when the major stocks in the bull-market sector have valuations that are less than half the broad market's average valuation; they end after valuations in the bull-market sector reach huge premiums. Right now, the world's two largest miners of industrial metals -- BHP Billiton and Rio Tinto -- are being valued by the stock market at less than 10-times earnings; and even if we assume that the prices of industrial metals are going to be, on average, 30% lower over the coming year than they are right now, at their current share prices these companies will still earn enough money to keep their P/E ratios in single digits. Furthermore, many of the smaller metal-producing companies are trading at even lower valuations than the aforementioned majors.
If a 6-12 month downturn in the prices of copper and the other industrial metals is in its early stages then the stocks of industrial metal producers will almost certainly trade at lower levels before the next multi-year advance gets underway, but there doesn't appear to be scope for them to trade a lot lower. This is because current share prices already discount much lower metal prices. Investors in these stocks should therefore be wary about getting too bearish at this time. The time to have done some selling was earlier this year when prices were spiking upward in spectacular fashion, not now that almost all of the speculative enthusiasm has been wrung-out of the market.
IF a significant economic slowdown is on the cards as far as the coming year is concerned then we are about to enter an extended period when gold-related investments will do much better than industrial-metal-related investments. Given that this is our expectation (we perceive a significant economic slowdown to be the most likely intermediate-term outcome) we would emphasise the gold sector when making new investments. At the same time we would maintain CORE positions in selected industrial metal shares, and if presented with the opportunity to buy a high-potential industrial metal share at a substantial discount to fair value we would seriously consider taking it.
One reason for maintaining core exposure to the industrial metals is that the long-term bull market is almost certainly intact (even if prices are lower in 6 months time, they will probably be a lot higher 2 years from now). Another is that our less-than-sanguine economic outlook might not necessarily be prescient. " |
