Copper has had a great 2016 thus far and positive sentiment seems to be building around the base metal. The below chart highlights copper’s rise and underscores copper demand since January.
The first reason has nothing to do with technicals or fundamental demand for the metal itself, but in the realization that it’s time for the U.S. dollar to take a breather. With the Fed unlikely to move on interest rates in first half of 2016, commodities are surging against a weakening U.S. dollar.
The second reason to be bullish on copper in 2016 is due to good old fashioned supply and demand. Despite the rise in price, investors are wondering if demand from Asia can outpace supply and reduce inventories. Let’s take a look at AQM Copper who, like many copper companies has been quiet for some time.
AQM Copper has spent many millions along with its partner, Teck Resources, in the development of its copper asset in Peru. As prices in certain commodities rebound and stabilize, expect news and interest to resurface on these types of deals. The company’s January 2013 PEA, was completed using copper prices of US$3.00/lb and a gold price of US$1,274/oz, respectively. Copper would have to increase more than 25% from current levels to get back to $3 per pound. Many companies have conducted PEA’s and other economic assessments using prices far higher than today’s. This has crushed investor interest and the ability to raise capital; however, if prices rebound to prices used in these assessments, expect interest to return.
Gold is a perfect example. The yellow metal climbed above $1,280 earlier this month, making many assessments and PEA’s previously conducted by companies all over North America accurate again.
AQM Copper provides a look at the fundamentals for copper that many junior resource stocks are hoping will move copper prices higher in coming years.
Copper demand is still heavily dependent on an emerging Chinese middle class. Fears that China’s economy is preparing for a collapse have been largely overdone in recent months, despite the reality the country is growing at a more modest pace. Below is an excerpt from AQM Copper’s website:
“Overall urban population increases (by 2025, one billion people are projected to live in urban areas) and 221 Chinese cities will have over 1 million people (Europe has 35 cities with over 1 million people). Along with those massive increases, increased demand will be seen for buildings (5 million projected to be constructed by 2025) and transit (170 mass transit systems projected to be built- Europe has 70). Ultimately, whether it is more people, more buildings, or more infrastructure, more copper will be needed to facilitate construction.”
source: http://www.aqmcopper.com/s/CopperFundamentals.asp
Obviously, if this rings true, there will be a significant demand increases for not only copper, but many other base and industrial metals.
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Copper: a technical review
Copper prices hit a high of $2.30 per pound last week and, at the moment, this is the resistance. Obviously any bounce in momentum signals would be beneficial and could signal a breakout. Copper has strong support at the $2.15 range as indicated by the below chart:
If copper can hold that support, it would be a bullish indicator and, another reason to be bullish on the metal.
In an early February article, titled Beware the ingenuity factor in bear markets, I warned of prices staying low for too long. This type of bear market results in some companies and intuitive geologists finding new deposits and ways to extract them in a cost effective manner. Below is an excerpt from that article:
“Expectedly, the price of copper has fallen as supply outpaces demand and growth in most major economies remains anemic.
As copper deposits become easier to define and super mines come into production, expect the supply glut to further increase into 2020. In an article titled New technique to find copper deposits, a geologist at the University of Exeter has found a “new and relatively inexpensive way” to uncover whether “certain types of magmatic rocks are more likely to contain valuable metal deposits.”
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Copper prices will be influenced by a falling U.S. dollar, real demand from Asia, which will result in decreased supply and inventory levels amidst that demand.
This article represents solely the opinions of Alexander Smith. Alexander Smith is not an investment advisor and any reference to specific securities in the list referred to in the article does not constitute a recommendation thereof. Readers are encouraged to consult their investment advisors prior to making any investment decisions. The information in this article is of an impersonal nature and should not be construed as individualized advice or investment recommendations.
