2011 Copper Trends

- August 30th, 2011

As 2011 kicked off, copper prices seemed unstoppable with the red metal continuing its upward trajectory from 2010

By Leia Toovey- Exclusive to Copper Investing News

The credit crisis, and ensuing recession have resulted in the price of copper plunging to $1.25 per pound from $4.00 per pound, however, the industrial metal was quick to recover and even set a new price record. As 2011 kicked off, copper prices seemed unstoppable with the red metal continuing its upward trajectory from 2010. In 2010, copper prices rose 30 percent, with half of that rise coming in the month of December alone.

Copper’s rapid price recovery was fuelled by growing demand from the emerging markets, most notably China, and signs that Europe and the United States were well on their way to an economic recovery. As demand rebounded on the back of China’s aggressive stockpiling program, it became evident that demand for copper would outstrip available supplies. As the supply deficit deepened, copper hit a record high in February 2011. Shortly after setting a new record, the pressure of political and economic instability caused a slide in prices. One key event that unsettled the global economy was the Japanese earthquake. In the aftermath of the earthquake was a big commodities sell-off, however, copper held its own during this tumultuous phase, with prices supported by the knowledge that Japan would have to rebuild- an event that would require more copper supplies from an already tight supply chain.

Unfortunately, the Japanese earthquake was not the only bump in the road. More concerns amassed as political unrest spread through the Middle East and North Africa. The Eurozone became embattled by a spreading debt crisis, and the United States struggled to pass a deficit; and ended up with a credit rating downgrade. In addition, key economic data out of a few world economies, including the United States and China, brought to light the fact that  not only was the recession’s impact deeper than previously thought, the possibility of a “double-dip” paralyzed the markets and caused massive sell-offs of both commodities and equities.

Copper’s price has been subject to a great deal of volatility since it set a record, and the overall trend is for lower prices. Despite the retreat, most analysts remain bullish about copper’s future. Global demand for copper is increasing while inventories and production of new supplies are declining. With the global economy rebounding, current copper supplies are not expected to be able to keep pace with skyrocketing demand. Traders maintain their stance that copper is supported by strong fundamentals, and the descent is a result of the overall macroeconomic picture, and not the copper market’s fundamentals. The ICSG has decreased its projected supply deficit; however, a supply shortage is still expected. While the recent rally has encouraged investment in finding new copper, and upgrading existing reserves, there will be a lag before new supplies will come online.

Mergers and acquisitions

Copper’s rally has sparked a “bidding war” for copper assets, and miners are keen to grab on to new supplies to position themselves to capitalize on high prices and the projected supply shortfall. One interesting bidding war we saw this year was the scramble to scoop up Equinox Minerals. Equinox attracted a few suitors, including China Minmetals, however, the final winner was Barrick Gold Corp (NYSE:ABX) which won the bidding war after offering an astounding $7.7 billion for the company. Barrick’s offer was, at the time, a 17 percent price premium on Equinox’s average share prices over a 20 day trading average.  At the time of the offer, Equinox had bid for Canadian copper and zinc producer Lundin Mining Corp (TSX:LUN), but had to drop that offer as directed by Barrick.

Equinox’s prized assets- the reason why the company attracted a bidding war, were its copper assets, including those in Zambia. Once Barrick’s purchase of Equinox made news, questions flew as to why Barrick, the world’s largest gold miner was interested in becoming a “diversified miner.” When Barrick CEO Aaron Regent was questioned on this,  his response was clear: Barrick was not interested in being a diversified miner and was only interested in copper assets. Commenting on the purchase, Regent commented that Equinox’s copper reserves are a “hard-to-come-by asset.”

Securities Disclosure: I, Leia Toovey, hold no direct investment interest in any company mentioned in this article.

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