Someone must have held a giant torch to the global copper market. Otherwise, how are mere mortals to make sense of this complete meltdown in copper-related stocks over the past couple of months?
Since early August, copper prices have slipped 30% from about $4.50 per pound to $3.11. Copper mining stocks have proven to be a devastating choice for 2011, with even popular favorites Southern Copper
I wish I could say I saw this coming. I did not. In fact, I sounded the "all-clear" for copper miners back in May following a prior correction, and as a result my concurrent selection of the First Trust ISE Global Copper Index Fund
What's melting these copper prices?
Contracting growth outlooks around the globe -- and in particular the growing concerns over a potential hard landing for China -- appear the most easily identifiable conductors of the metal's sudden weakness. But that's far from the whole story. In addition, persistent debt distress in European markets has fomented a noteworthy advance for the U.S. dollar index. In fact, as my colleague Sean Williams points out, the dollar has outperformed even silver year-to-date on the strength of its recent rally.
Given that powerful one-two punch, copper is obviously not crashing by itself. Rather, the full suite of industrial raw materials -- including steelmaking components iron ore and metallurgical coal -- have suffered in tandem. So after a decade of extraordinary price gains for copper and other key commodities, is this the end of the line for the broader commodities bull market? According to this Fool, certainly not! As was the case in 2008, when a far deeper correction blasted the sector and buried related equities miles below any rational notion of fair value, I maintain this latest event will likewise produce merely a volatile chapter within the long-term secular bull market for commodities … rather than a lasting reversal of the trend. That's not to say the current correction could not carve deeper still, since expectations for industrial demand around the world clearly remain fluid.
While there can be no doubt that a relative slowdown in China could send powerful waves of repercussions throughout the global economy, I find it extremely difficult to envision a scenario where China's demand for copper ceases to mount. Furthermore, nations around the world facing bleak economic conditions will likely turn to public investments in infrastructure for stimulative effect. Combining that baseline demand outlook with persistent constraints on global supply, I maintain we are still left with a sound fundamental framework for copper despite global growth concerns. Equipment manufacturer Joy Global
The seaborne markets for copper, coal and iron ore continue to be driven by strong demand from China, India and other emerging markets. Although industrial production and export growth is showing signs of slowing in China, massive infrastructure programs should sustain GDP growth at high levels. Imports were reduced as China worked down inventories of copper and coal in the first half of this year, but recent increases of imports have started to replenish these stocks. This move from de-stocking to restocking for copper and coal will support commodity demand even if growth slows.
As the macroeconomic outlook continues to dim, some taming of expectations for copper demand is wholly appropriate, but from my vantage point the recent sell-off in shares of quality copper producers smacks of a disconnect from resilient long-term fundamentals. What's more, when we consider that a single trader -- identified by The Daily Telegraph as none other than JPMorgan Chase
The Foolish bottom line
At around $3 per pound, copper prices remain quite elevated from a historical perspective, and my ongoing analysis of the global supply pipeline combined with baseline demand expectations from China and emerging markets continues to support a long-term bullish outlook for copper and the low-cost miners that produce it. Frankly, notwithstanding the recent dollar rally, the long-term outlook for the U.S. dollar and other structurally strained currencies supports that case. Without daring to declare a bottom in this near-term sell-off, I cannot ignore the glaring valuations left in its path. Taseko Mines