Dr. Copper

There's a lot of conventional thinking being put out regarding the U.S. economy and base metals. Basically these pundits point to a U.S. and European recession and see a drop in base metal prices. That's because copper has often been called the metal with a Ph.D. -- a barometer if you will for current economic activity.

At best, I find these arguments using the total size of American and European economies vis a vis China to be specious.

First off, it doesn't address the specific demand of base metals, so let's talk turkey here. Looking at copper, let's see where it's been consumed and what applications have (and will be) crucial to its demand. The historical record already shows that the importance of the US as an engine for metals consumption has been declining rapidly. Since 1998, US copper consumption as a percentage of global demand has declined from 21% to 13% in 2006.

It's was running around 11% at year end 2007.

Over this same decade time frame, China's consumption has more than doubled from 10% to 22%. And over the next five years, China will spend more on underground and overland rail networks than the rest of the world has spend in the last 20 years! (Credit Suisse, Brave New World II, Nov. 2006). Those facts are happening within the total size of the $13 trillion US economy and the $3 trillion Chinese economy. To look at the total US and European economies and say that if they go into a recession, base metals will tank, ignores the specific applications and markets where those metals are used.

It's ignoring that the smaller Chinese economy already uses double the copper (22%) than the larger US economy's 11%. I would think it more appropriate to reduce the American 11% of global consumption by the amount you think US usage will fall due to any economic slowdown. And I do that with US housing in a minute.

China currently spends some US$125 billion per year on infrastructure. Of that, nearly US$70 billion is allocated to the railway system with the balance going towards the improvement of roads, airports and seaports. A typical diesel-electric railroad locomotive uses about 11,000 pounds of copper.

Some 80% of China's copper usage is for infrastructure related requirements -- base metals that are largely imported into the Middle Kingdom. Very little is shipped out as Chinese exports to buyers like Walmart.

Others observers cite the emerging Asian middle class consumption in your side of the argument. And rightly so. Motor vehicles, once cited as a luxury for individuals in China, have become standard consumer products for growing numbers of families. Projections for number of vehicles purchased annually in China are ten million units by 2010. Some estimates place China ahead of the US as the largest car market by 2020. Today's average automobile contains between 50 to 60 pounds of copper.

And Tata Motors recently launched their Nano model -- a $2,500 car targeting India's emerging middle class. If you've lived in Asian and seen the a whole family perched on a single motorcycle, think of millions of potential buyers who no longer want to carry groceries home in the rain the old fashion way.

India currently represents only 3% of global metal demand but Credit Suisse research predicts a 1% increase over the next five years from the country's US$350 billion infrastructure program gathers pace. The Indian government intends to spend US$5 billion on the construction of 10,000 km of freight railway lines by 2010, according to the Indian Railways budget. It has also embarked on an ambitious plan to add about 100,000 megawatts of electricity to its national grid by investing US$175 billion by 2012.

Russia announced a major investment spending program to reinvigorate its electricity industry. In Europe, electricity generation is likely to require an additional 1 million tonnes of copper over the next ten years.

US Housing

One of the major concerns with the current copper market is the softening of the US housing market which consumes a quarter of the US copper demand. The average 2,100 sq.ft. single-family home uses 439 pounds of copper, mostly for wiring and plumbing. If US housing starts were to fall by one million homes (about 50%) the reduction in US demand would be just under 200,000 tonnes of copper. This translates to an 8% reduction in US demand and only a 1.25% reduction in global copper demand.

So yes, among commodities "base metals" prices will probably be among the more volatile, but the trend is clearly "north". I don't foresee copper prices going back to 2004 levels just like I don't predict will ever see $75 oil again.

Peak Oil

Where one stands in the "peak oil" debate should also be factored in future demand for base metals. In the 1950s, a lot of metal uses were replaced by very cheap plastics. With oil circa $100 a barrel, we are already seeing substitution of petroleum based products back to metals for simple cost reduction reasons. That trend should continue.

Additionally, high oil prices are already creating a huge investment in clean tech space. Everything from the Toyota Prius which uses 50kg of copper per car -- twice as much copper intensity per automobile as a conventional car -- to wind farms are creating new markets (new demand) for copper and

Given its high corrosion resistance properties, other key base metals like molybdenum (often produced together with copper) are especially crucial for nuclear plants and oil pipes. Where do you see nuclear energy about ten years out? I keep reading about a lot of planned new nuclear reactors...over 30 are currently being built. Will increasingly wealthier Asians consume more electricity in the years/decade just ahead?

How about wind? According to Brian Evans, vice president of RES America Construction, Inc., their Sweetwater II wind farm, not counting the turbines, transformers and control wires, contains more than 35 miles of copper low-voltage and grounding cable and more than 67 miles of copper in the neutral conductors of high voltage power cable.

Junior Companies

Junior base metal plays are "open ended call options" on their specific metal properties. And juniors are very much a play on the long term trend. This is not a specific commodity future investment where very short term pricing pressures have to be a major consideration. They're typically Canadian -- also good news in that you can hold equities in one the world's strongest (and resource based) currencies.

I buy juniors with one "best case" scenario in mind: the someone will take my shares in a merger. As base metal "majors" are continuously depleting their assets and they look to juniors -- the de facto exploration arm of the industry -- as their source to find new reserves so they can do meet one key objective: stay in business.