By Richard (Rick) Mills
As a general rule, the most successful man in life is the man who has the best information. In this author’s opinion, China, and to a lesser extent India and other developing nations, are responsible for the largest and longest base metals bull market the world has ever experienced. Many fear the bull market for natural resources is over when in fact nothing could be further from the truth. This seems especially true, because of the supply/demand picture, regarding copper.

Copper's chemical and physical properties:

• High ductility
• Corrosion resistant
• Malleable
• Excellent conductor of heat and electricity
• Alloyed with other metals - zinc to form brass, aluminum or tin to form bronzes or alloyed with nickel - it acquires new characteristics for use in highly specialized applications.

Copper is used for:
• Conducting electricity and heat
• Telecommunications
• Transporting water and gas
• Industrial machinery and equipment
• Coins for currency
• Roofing, gutters and downspouts
• Protecting plants and crops
• A feed supplement

Copper’s price hit US$3.75 per pound in May 2006 after rising from a 60 year low of US$0.60lb in June 1999. By February of 2007 it had dropped to US$2.40lb but had rebounded to US$3.50lb by April 2007.

By February 2009 copper prices were - because of weakening global demand and a steep fall in commodity prices - at US$1.51 per pound.

Copper prices started a comeback and during the summer of 2009 and again during the summer of 2010 the price of copper defied conventional market wisdom – sell in May and go away – by rallying strongly and in 2010 managed to hold close to its recent highs coming into the end of August.

Copper inventories at the London Metal Exchange (LME) and Shanghai Futures Exchange have both seen dramatic reductions.

Copper exploration/development companies looking for or trying to develop deposits already found and copper miners looking to expand their production capacity are all facing some serious challenges:
• Falling ore grades
• Country risk
• Water supply
• Labor problems, strikes
• Shortage of skilled labor
• Cost of capital for project finance
• Capital cost overruns
• Tax and sharing initiatives
• Energy costs
• Inadequate exploration funding - The Metals Economics Group estimates that exploration spending plummeted 42 percent to $7.7 billion in 2009.
• A lack of new discoveries
• Currency fluctuations

"The reason why the prices are holding up so very high is that there has been only marginal increases in new copper mine development over the past five years." Patricia Mohr, Vice President, Economics at Scotiabank Group in Toronto.
On August 24th 2010 The International Copper Study Group (ICSG) released preliminary data which showed world copper production fell short of refined usage by 190,000 tons in the first five months of 2010.

This author believes the full ICSG report showcases an underperforming industry and tells us there is the potential for a large copper demand/supply imbalance coming in the near future.

Also consider:
• The declining rate of production at the world's largest copper mine, Escondida. BHP Billiton forecasts a 5 to 10 percent production cut at the mine this year due to lower ore grades - Bart Melek, Global Commodity Strategist with BMO Nesbitt Burns in Toronto, said this could take as much as 80,000 to 100,000 tonnes of copper out of the market.
• U.S. copper mine production had been expected to increase by more than 200,000 tons last year, instead production declined by 120,000 tons
• Rio Tinto and Freeport McMoRan both saw their output drop in the first six months of this year
• A lack of investment in new mining capability because of recent low prices
• The growth in demand from China, India and other emerging markets
• Consistent declines in warehouse inventories are underpinning the price of copper
• A low interest rate environment bodes well for the whole resource sector
• The overall weakness in the U.S. dollar translates into support for dollar denominated metal prices
• The potential for a drop in production from Australia - the world's fifth largest copper producer - as a result of a resource tax the government might implement
• India's power production needs to rise by 15 to 20 percent annually which means, according to the International Energy Agency (IEA), India needs to invest $1.25 trillion by 2030 into its energy infrastructure. Because of this investment into new infrastructure India's annual copper demand is expected to more than double to nearly 1.5 million tonnes by 2012 - up from a current 600,000 tonnes. India usually exports between 100 and 150,000 tonnes a year, Indian copper exports are likely to cease and indeed Indians might become large copper buyers

"There is no question that the current production numbers are to some degree validating that there is an issue starting to manifest itself on the supply side.” Mark Liinamaa, vice president of market research with Morgan Stanley.

"Prices are underscoring the relatively robust nature of physical conditions and from a business cycle perspective inventories remain fairly low. If economic conditions deteriorate there isn't going to be that much destocking as manufacturers have been quite disciplined ... The market is factoring in the fact that supply tightness is not going away." Dan Brebner, analyst at Deutsche Bank.

According to Barclays Commodities Research analysts copper is forecast to average $6989/t this year and $7763/t in 2011.
For 2011, BMO anticipates a global supply deficit of some 280,000 metric tons, with a price forecast of $3.70 a pound.
Investors have concerns:

• The extent of the recovery currently underway in the US and Europe
• A slowdown in Chinese growth Continued...