Red-Hot Resources

"Luck is not chance, it’s toil; fortune’s expensive smile is earned.”

Monday, November 20, 2006

Opportunity or Wishful Thinking?

In a report dated Nov. 2, Credit Suisse is saying that China's copper demand growth may DOUBLE next year to 8%. That would create a supply shortfall of 252,000 metric tonnes.

This comes on the heels of Credit Suisse's VERY BULLISH sector review for copper, which it publishd October 12.

Basically, Credit Suisse says that the big problem in copper is not the weakening US housing market -- the number of housing starts in October was the weakest since July 2000 and was down 27 percent from a year earlier -- but rather a credit tightening cycle in China. They believe the credit tightening cycle will end soon.

When that happens Credit Suisse expects a major restocking cycle in China, one that could be between 200,000-400,000 tonnes and add 2% to global demand next year.

Credit Suisse also singled out India, which has announced a $350 billion infrastructure spending programme. India copper demand growth is currently growing 16% per year (starting from a smaller base than Chinese copper demand). Credit Suisse expects India's demand for copper to increase from 4% of global consumption to 10% by 2010.

This is the context in which we must view Freeport McMoRan's $26 billion bid for Phelps Dodge. That bid carries a 33% premium to Phelps Dodge's price before the announcement. Obviously, FCX believes copper prices are going much higher. Standard & Poor's likes the news -- it says it may upgrade FCX.

Meanwhile, The London Metals Exchange said today that copper stocks monitored in its warehouse rose by another 2,050 tonnes to total 158,025 tonnes. LME copper stocks have now risen 44% from a recent low of 109,600 tonnes.

So are Credit Suisse and FXC right? Are the falling housing starts and rising stockpiles of copper just giving us a buying opportunity? Or are they "buying the top" of the market?

Read Credit Suisse's October 12 Sector Review and decide for yourself: Download CS Oct 12 report on Copper (.pdf)

Labels: , , , , ,

Check out my new gold and energy blog at