An Investment U White Paper Report

By the Investment U Research Team

Though it isn’t as flashy as gold, silver and oil, copper ranks high on the commodity list.

Its price is often a very reliable indication of the health of the global economy, considering how much of the world’s infrastructure – transportation, telecommunications, construction, etc. – rely on copper.

Yet the metal is often dismissed by Wall Street as just another commodity. And at first glance, who can blame them when there are so many more exciting investment opportunities to look at?

Still, copper can be just as profitable… if not more…

Copper: The Demand Story

Much of the growing global demand for copper doesn’t come from the U.S. or Europe.

Instead, it comes from emerging economies around the world, their rising living standards and increased infrastructure projects. The rapid rise of a middle class in emerging markets has led to dramatic increases in demand.

Unsurprisingly, much of that stems from China, where allegedly as much as 38% of the population is now considered middle class. And that figure may increase significantly over the next decade.

As people move from one class bracket into higher ones, they automatically begin seeking out better lifestyles. That includes better housing, which means an increase in residential construction. And that means more wiring for electricity, more plumbing and more basic electrical appliances… all of which require huge amounts of copper.

Along with that, a few years back, China committed to spending at least $585 billion on such projects, and India was projected to spend over $500 billion by 2015. All in all, Asia (excluding Japan) could shell out a total of roughly $1.4 trillion in just a few years on infrastructure.

In September 2012 alone, Reuters reported that China approved 60 infrastructure projects totaling over $150 billion!  

And while current government and even consumer spending might be at risk over the short-term thanks to President Xi Jinping’s anti-corruption efforts, the long-term picture is likely much different.

It doesn’t at all seem unreasonable to estimate this market’s future by examining the recent past, which shows China accounting about 40% of global copper demand, which naturally sent prices soaring.

The Supply Story for Copper

Now it has to be noted that the supply-side picture is looking much different these days…

Back only a few years ago, there was a lot of concern about a dearth of new mines. No major new discoveries were being made and it seemed that picture wasn’t going to get any better going forward. But it just goes to show how difficult it is to predict the future, because we can now look back at a few monumental discoveries in the recent past.

Back in March, 2013, Bloomberg reported:

“Copper supply will outpace demand by between 100,000 and 200,000 metric tons in 2013, Juan Carlos Guajardo, executive director of the Center for Copper & Mining Studies, said in a telephone interview from Santiago today. The copper market is bracing for a first surplus in four years on increased output from new and existing mines, the International Copper Study Group estimates.

“‘In previous years we faced an important deficit,’ Guajardo said. ‘The question is whether the surplus is enough to put pressure on prices or [if] the higher demand in China is able to absorb this transition to surplus.’”

So this market might not be as profitable in 2013 as it was in 2010.

For Those of You Still Bullish on Copper

As usual, the bulls and bears of this particular market can both point to a number of reasons why they’re right and the other side is wrong.

And while you can find any number of quack arguments to support just about any subject out there – investing-related or not – this time it’s difficult to easily dismiss one side or the other. For the present, at least, the predictive picture seems relatively evenly split between two outcomes… copper prices dropping over the short to mid-term or rising in that period.

For those who believe copper is too important a metal to take too big of a tank for too long, try looking into major mining companies such as BHP Billiton (NYSE: BHP) and Rio Tinto (NYSE: RIO).

Freeport McMoran Copper & Gold (NYSE: FCX ), the world’s largest, publicly traded copper producer also should profit off of any upmove. Its Grasberg mine in Indonesia features high-quality ore and is one of the most competitive mines in the world.

ETF fans can look into the  Global X Copper Miners ETF (NYSE: COPX ) or play the metal more directly with the iPath Dow Jones-UBS Copper Subindex Total Return ETN (NYSE: JJC ). The latter is structured to correlate to the performance of a copper futures contract traded on the COMEX.

But one way or the other, be careful, at least in the short-term. This market isn’t determined by any means for 2013, and it’s best to handle it with the caution it deserves.

Good investing,

The Investment U Research Team