Hopefully, in the way you earn a living, you are not dependent on commodity prices, however if you think about mining, one of the considerations should be the commodity price cycle. Hopefully most young people when they learn something about economics see the price-demand charts. For the mining companies of the world, those charts are what defines them. The higher the demand, the higher the prices. For investors around the world, when you hear about the return to normal that should mean higher demand for something. If President Biden passes the infrastructure bill, it will mean higher demand for basic commodities and that means higher prices because of more construction.
Generally when the average person thinks about commodities they think about gold and silver. (apparently there is a day in Vietnam where the average citizen is suppose to buy gold to have a lucky year – if one is cynical, the jewelry companies are doing a great thing in the country). For industrial purposes the commodity to think about is the price of copper. Some of the readers will remember a number of years ago, the price of copper was high enough for people to strip old houses of copper, go to electrical utility sites and steal copper. Hopefully people are not doing that now.
In an article by Niall McGee, copper futures hit a 8 year high trading as high as $3.84 a pound on the Chicago Mercantile Exchange or CME. The reasons why copper is increasing in price is rebounding global demand (more users), a tightening supply and looking to the future on copper’s use in a green energy world.
Robin Bhar, an independent consultant with London-based Robin Bahr Metals & Mining Consulting believes the market is overheated, because speculators have jumped into the metals.
Citibank analyst Alexander Hacking noted Citi expects demand will outstrip supply by a half million tonnes of copper this year. In the future, the green deal could increase the demand because battery powered electric cars typically use about 3 times more copper than internal combustion engine cars. (although the reality is work will go on to find a less expensive alternative).
In 2011, copper prices peaked at $4.50 a pound. The price fell in 2012, when expectations of China’s demand fell dramatically. At the moment, the existing mines are forced to dig deeper which is more expensive to the miner. However there are mines being developed in Democratic Republic of Congo, Chile, Panama to name a few places around the world.
Linking to dividend paying stocks, in some industries the most important aspect of the business is the commodity price and all you have to do is look at the price and determine is the price going to be stable or go up or down? If you believe the price is stable and will go up, you can invest and you should have capital gains and dividends as the company makes profits. If you determine the other direction it is time to find alternatives that are more stable. Think about those simple supply and demand charts (guns versus butter) and try to bring you investments down to the simple level. Then it is easier to make a decision to hold or find alternatives.
There are more questions than answers, till the next time – to raising questions.