Demand, low inventories send copper prices flying

When copper producers in the future look back at 1987, they will probably do so with some fondness. Steadily rising prices this year have seen the base metal touch $1.25(US) per lb on the London Metal Exchange, the highest price for the metal in more than seven years.

Copper at the beginning of this year was selling at just over 60 cents , and had been averaging in the 62 cents -65 cents range the previous three years. Demand, the firm of Brown, Baldwin, Nisker points out in a recent commodity report, was relatively flat.

Today, demand exceeds production while at the same time producer and commodity exchange inventories have been falling. “Each year prices improved as seasonal demand picked up, but it is obvious that in the industry both buyers and sellers were willing to use inventories to accommodate the shortfall each year, rather than bid up the price,” writes Brown, Baldwin, Nisker.

The firm, projecting an average copper price this year of 74 cents , remains bullish for 1988, for which it is predicting an average price of 89 cents .

On the other side of the coin, Raymond Goldie of Richardson Greenshields is forecasting strong copper prices until year-end, to be followed by a drop to below 70 cents . Most of the increase for the metal has come from new fabricating plants in the Pacific Rim and does not represent an increase in demand by end-users; hence, the increase is not sustainable, he says. Production boost

Goldie says there is room for hikes in production at the world’s smelters and refineries, and he suggests the bigger increases in production will come from mines in North America and the Pacific.

For the investor, Goldie says, the emphasis has changed to stocks with “liquidity” and “quality” as opposed to the commodities a company produces. His investment recommendations, therefore, tend towards large, “liquid” firms with strong earnings and strong earnings growth.

John Hampton, vice-president of copper sales for Noranda Minerals, who has been watching the copper market grow tighter and tighter this year, says both the Horne smelter in northwestern Quebec and the Gaspe smelter on the Gaspe Peninsula are currently running at capacity. Ironically, Noranda closed its copper mining operations at the Gaspe site this year following a fire in which one miner died.

Among Canada’s provinces, British Columbia is the top copper producer. Three of the bigger mines in that province benefiting from higher prices are Highland Valley Copper, a joint venture involving Cominco Ltd., Teck Corp. and Lornex Mining; Gibraltar Mines, which is controlled by Placer Dome; and Brenda Mines, whose major shareholder is Noranda. In the United States, Phelps Dodge’s primary metals unit recorded earnings during the first nine months of 1987 almost double what they were for the same period last year.

A graph of monthly average copper prices during the last 15 years shows copper prices last peaking in 1980, and before that in 1974, suggesting price movement may be cyclical (peaking every six or seven years?) in nature. The 1980 “peak” coincided with an upswing in precious metals prices which saw gold rise to more than $800 per oz.