| Wednesday, September 16, 2015 | | | 3 Reasons Why Copper Just Bottomed!
 The last time I wrote about copper, things looked pretty bearish. But I said that all bear markets must come to an end... and you should start making a shopping list.
That list might come in handy soon.
The copper market has been turned upside down due to some extraordinary events.
You'll remember I told you copper prices hit a six-year low. This was due to a slowing Chinese economy and rising production from miners that had expanded operations during the commodities boom of the 2000s.
In fact, prices were expected to go even lower! Just a few weeks ago, most analysts were expecting huge surpluses in the copper market for 2015 and 2016. I'm talking at least half a million metric tons, and some estimates were even higher.
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Holy moly, has that changed in a heartbeat. Here are three reasons why copper is about to make a comeback...
Comeback No. 1: Freeport Cracked
Arizona-based megaminer Freeport-McMoRan (NYSE: FCX) announced in August that it would suspend operations at some U.S. mines.
The company has seven copper mines in North America. Freeport will suspend operations at its Miami mine in Arizona and cut production in half at its Tyrone Mine in New Mexico. Freeport also says it will "adjust" rates at other U.S. sites and reduce its workforce by 1,000.
This is all to save Freeport money in a time of rock-bottom copper prices. Freeport now plans to spend $2 billion on mining in 2016, for a total capital budget of $4 billion. That's down from the $5.6 billion forecast in July.
What's more, Freeport has been battling the Indonesian government over the company's huge Grasberg mine in that country. Indonesia wanted Freeport to send most of its production to smelters in Indonesia, so, to enforce that, it put a huge export tax of 25% on copper concentrate.
In the current market, Freeport was in no mood to bargain. It simply suspended operations. Finally, Indonesia slashed the export tax to 7.5%. It's not a completely one-sided agreement. Under the deal, Freeport Indonesia will pay higher royalties, build a smelter and pay tax on copper concentrate exports. Meanwhile, parent company Freeport-McMoRan said it will sell around 20% of its stake in the Indonesian unit to local investors in coming years.
Freeport is grudgingly restarting exports, but at lower levels. The situation in Indonesia seems touchy, and we'll have to see how it develops.
Comeback No. 2: Glencore Brings Relief to the Bulls
In early September, Glencore PLC, a huge copper producer, stunned the market by announcing it would suspend production at its African mines for 18 months.
The Katanga and Mopani mines are located in the Democratic Republic of the Congo and Zambia, respectively. Their suspensions will remove about 400,000 metric tons of copper cathode from the market. Copper cathode is the raw material used to cast copper rod for the wire and cable industry.
These two mines alone account for 1% to 2% of global copper output. And as any trader can tell you, prices are made on the margins.
Comeback No. 3: China's Surprise
China is very important to the copper market. As the world's second-largest economy, China accounts for 45% of total copper demand (22 million metric tons). And a big concern is that as China's economy slows, it will need less copper.
So it was a shocker when new data showed China imported 350,000 metric tons of copper in August. That's up 4% from the year-ago period.
Now, China's copper demand situation is still murky. For the first eight months of this year, China's copper imports declined by 8%. And analysts' estimates were all over the place. Platts expects Chinese copper consumption to rise 6% year over year in 2015. On the other hand, Bloomberg expects China's demand to fall between 2% and 4% in 2015.
But now, thanks to these three developments - Freeport, Glencore and recent Chinese demand - analysts are lowering their estimates of a global surplus. And some are even talking a deficit.
Citigroup says the copper market will have a deficit of 284,000 metric tons in 2016. That's nearly triple its previous forecast.
And what is all this doing to the price of copper?
That sure looks like a bottom in copper, though only time will tell.
Investors can play this through one of the miners. Or, if you prefer the metal itself, you can consider...
- The Powershares DB Base Metals Fund (NYSE: DBB). It tracks an index of aluminum, zinc and copper. It has an expense ratio of 0.75%.
- The Dow Jones-UBS Copper Subindex Total Return ETN (NYSE: JJC). It also has an expense ratio of 0.75%.
All the best,
Sean
P.S. Given the current environment for energy and resources, many of you may not be as confident as you used to be when it comes to investing in those sectors. That's why, for a short time, The Oxford Club is offering $50 off my course, Resources to Riches Alliance. With Resources to Riches Alliance, you'll regain your confidence and learn everything you need to know about investing in energy and natural resources. Just use the coupon code RICH50 when you go to check out to claim your discount. To find out more, click here.
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