Copper: The Utility Infielder of Metals

May 17, 2015 by

Taking a brief respite from our normal discussions of investment commodities in gold, silver, platinum and palladium, it’s time to give credit where credit is due with a nod to the perfect utility metal: Copper.

Copper was one of the earliest exploited metals by ancient man, and is one of the most versatile elements known to modern man. A copper pendant found in northern Iraq has been dated to 8700 B.C., indicating that raw copper has been used by man for nearly 11,000 years.1 Archeologists found evidence of ancient man using archaic smelting technologies in 5000 B.C. to alloy other metals with copper in order to increase its strength and workability for the development of tools and weapons.2 In September 1991, a well-preserved early man – known affectionately as “Otzi the Iceman” – dating 3300 to 3200 B.C., was found frozen in the Otzian Alps, carrying a copper ax among his possessions.3 Suffice it to say, copper has been around the block.

Copper was also used historically as a store of value. Ancient Egyptians, Greeks and Romans each minted copper and bronze coins, although these coins are viewed to hold considerably less value than the more common gold and silver currencies of the day. In general, the value of a copper-based product was historically measured in the appreciation for the finished good rather than an absolute value for the underlying metal.

Based on its durability and conductivity, copper’s usage spans a wide swath of industrial applications, including electrical transmission lines, electronics, telecommunications, automobiles, and machinery. More than half of the copper produced is used for electrical transmission and construction purposes.4 Its lightweight property lends itself to use in the construction industry for roofing, flashing, and rain gutters, while its heat dissipation and anti-corrosive qualities make it a perfect element for use in cookware and shipping.

Ever wonder why most water pipes in your home are copper? Not only is copper anti-corrosive in water, and easy to form in construction projects due to its lightweight and flexible characteristics, but its intrinsic chemical properties also make copper a natural anti-microbial material, destroying microorganisms including microbiotic heavyweights such as e-coli, influenza, fungi, and the lethal MRSA (methicillin-resistant staphylococcus aureus) bacteria strain. Explain that to the next contractor who suggests PVC in the construction of your new home!

Less Traditional Use Of Copper
There is, of course, another less traditional use of copper. That is, using the spot price of copper per metric ton as an econometric indicator to measure sector performance, as narrow as activity in the housing or automobile industries, or as broad as a global economic indication such as with global industrial production. (Figure #1) As indicated in the below chart, the price of copper has understandably been closely correlated to economic performance, particularly with industrial production.

Source: EverBank Research Team, analysis based on publicly available data from Global Economic Monitor, Worldbank.

Moreover, much like the Australian dollar can be used as an adequate proxy for global growth and gold has historically been considered the benchmark for precious metals, price levels of copper can similarly be used as a good bellwether for the broader commodity complex. (Figure #2) In fact, the below figure indicates a correlation of 96% between the London Metal Exchange spot price of copper and the International Monetary Fund’s (IMF) commodity price index. Want to see how your commodity fund manager is performing? Just compare it with the performance of copper and you should be in the ballpark.

Source: EverBank Research Team, analysis based on publicly available data from Global Economic Monitor, Worldbank, International Monetary Fund.

Investment In Copper
As a commodity, the longer-term value of copper will naturally be a function of the supply (production) and demand (consumption). As the pricing chart above indicates, the price of copper rose dramatically between 2003 and the end of 2008, coinciding with an acceleration of emerging market growth beginning in the early 2000s and lasting through the beginning of the financial crisis.

Throughout this period, emerging market economies, primarily China, had a voracious appetite for the consumption of copper, using the metal in the development of electrical infrastructure and construction. Since the beginning of the global economic recovery, copper production has been lagging copper consumption, generating global imbalances in both current and projected copper levels (Figure #3). Clearly, shorter-term values of copper will also be a function of other market variables, most notably U.S. dollar values, but this imbalanced market is certainly one that could attract investors.

Source: EverBank Research Team, analysis based on publicly available data from AQM Copper Inc.

One such consummate bargain hunter, China, has been doing just that – buying stores of copper to both support its continued infrastructure spending and add to its copper holdings. Since 2009, China has been buying copper at a rate beyond its infrastructure requirements, using reserve investment in copper and other raw materials in order to, according to one analyst, “extricate itself from dollar dependency as fast as it can.”5 Furthermore, China’s State Reserve Bureau may view investment in copper as a home run in the race toward the commoditization of hybrid cars, which use copious amounts of copper. As such, the country’s State Reserves Bureau is anticipated to buy more than twice the amount of copper it had planned for 2014, taking advantage of relatively attractive pricing.6

So, how can individual investors take advantage of opportunities in copper? I will tell you that one enterprising group of speculators has taken to collecting items that many of us simply throw into a jar to collect dust on the shelf. That is, the good ol’ U.S. Mint penny. Prior to 1982, the U.S. penny was made of 95% copper,7 worth approximately 2.2 cents based on copper pricing at $8,000 per metric ton.8

“Penny Hoarders,” as they are christened, are avid collectors of pre-1982 pennies due to the intrinsic value of the copper. They wait in hope for the day that the U.S. eventually abandons the penny as a store of value, providing the opportunity to melt down the pennies for their smelted value. The thought is that these arbitrageurs will double their investments by purchasing pre-1982 pennies at one cent on the dollar and sell them for more than two cents on the dollar, depending upon the prevailing price of copper. Unfortunately for these entrepreneurs, their current investment premise hinges on the Federal government lifting laws making it illegal to melt U.S. pennies.

I would argue that a more sensible approach to investing in the copper market is to consider a ‘picks-and-shovel’ approach, namely, analyzing those markets where copper is produced and then considering an investment in the respective currency.

Copper is mined and produced in only a select number of countries, where 90% of global copper production is concentrated in only 14 geographies (Figure #4). In the below chart, we can identify a number of currencies where the production of copper would enhance other economic attributes, including the Chinese renminbi, Australian dollar, and Canadian dollar. This is not to say that these currencies will correlate perfectly with the price of copper, but it could certainly act as a potential tailwind.

Source: EverBank Research Team, analysis based on publicly available data from US Geological Survey.

As always, investors should be mindful that investments in emerging market economies are an inherently risky proposition, and should only be considered for those investors whose risk profile, capacity for risk, and time horizon are appropriate for speculative investments. Risks including market volatility, geopolitical, sovereign, governance, bankruptcy and liquidity can be amplified with investments in emerging markets, and should be strongly considered when determining exposure and position sizing for a properly diversified portfolio.

Nevertheless, the next time you flip on a light switch, grab a drink of water from the tap, power up your cell phone, or step over that lucky penny on the sidewalk, know that there may be true value right at your finger tips.

Until the next Daily Pfennig® edition…

Sincerely,
Chuck Butler
Managing Director
EverBank Global Markets Group
1.800.926.4922
www.everbank.com