China’s Copper and related purchases in February declined 35% month over month. The country has been stockpiling Copper for months and declines are to be expected. Yet, the market has to figure out if it is a pause in Chinese demand or if it is a signal of slowing growth which could be the result of tighter monetary policy in the country.

The US Dollar index has strengthened in recent days after finding support at 76. At the least, the short-term trend has turned positive and that will impact Copper and the like. The Euro has turned back down amid renewed sovereign debt concerns as Spain’s credit rating was downgraded.

As we noted in our previous commentary, Copper had potential upside targets but it stalled out well below those targets. That suggests the market is tired and needs to fall in order to find a short-term equilibrium.

Turning to the technicals, we see that Copper failed at both $4.35 and now $4.25. The metal appears to have broken down but we should note the bullish hammer candlestick from today’s action. This reversal could give the market some legs. Beyond a short-term oversold condition, the market’s trend is lower. Longer-term charts show support at $3.80-$4.05/lb.

This update is the property of CME Group

One culprit of the weakness was higher Oil prices, which of course could dampen economic growth and demand for Copper and the like. Crude Oil soared to $100 on unrest in the middle east, but it has yet to breakthrough that barrier. Relative weakness in Crude has provided further support to Copper. As long as Oil remains below $100, it shouldn’t have too much of a negative impact. We should also note the better than expected numbers on durable goods orders and jobless claims.

In other news Barclays Capital is reducing its exposure to Copper. They still see the market as tight but believe that Chinese demand has cooled off and exchange inventories are rising. Barclays is now more positive on Nickel.

Stockpiles at the London Metal Exchange continue to grow. They are up almost 20% in just two months.

Turning to the chart, we see that Copper has found support at $4.25, which has been previous support. Look for Copper to continue higher before battling resistance at $4.55. The market does have a chance to retest the high. However, a retest is no guarantee of a breakout.

Investing in copper might be the simplest way to profit from the ongoing global urbanization.

China has one fifth of the world’s population and India has another 1.2 billion people. India’s economy expanded at 8.9% in the quarter ended September 30th while China’s economy expanded at 9.8% in the quarter ended December 31st.

China and India consume a lot of copper. Key drivers of increased copper consumption in both countries is infrastructure build out – power, construction, energy and transportation.

India’s power production needs to rise by 15 to 20 percent annually which means, according to the International Energy Agency (IEA), India needs to invest $1.25 trillion by 2030 into its energy infrastructure. Because of this investment into new infrastructure India’s annual copper demand is expected to more than double to nearly 1.5 million tonnes by 2012 – up from a current 600,000 tonnes. India usually exports between 100 and 150,000 tonnes a year, Indian copper exports are likely to cease and indeed Indians might become large copper buyers.

With less than 1/3 of the population India’s urban areas generate over 2/3 of the country’s GDP and account for 90% of government revenues. A report done by the McKinsey Global Institute called India Urban Awakening predicts that 590 million people or 40% of India’s population will live in cities by 2030, up from 340 million today.

China’s current urbanization rate of 46 percent is much lower than the average level of 85 percent in developed countries and is lower than the world average of 55 percent. China has set a goal of 65 percent of urbanization rate in 2050. Over the coming 40 years that means 20 percentage points of urban growth per year. This translates into 300 million rural residents becoming urban residents over this time period – last year the disposable income of the Chinese urban population stood at 17,175 yuan per capita while the net income of the rural population was 5,153 yuan per person.

The annual per capita consumption of copper in India is 0.47 kg, China’s 5.4 kg and the world average is 2.7 kg. China’s urbanization plans and forecast GDP is expected to drive Chinese copper consumption from the current 5.4 kg/capita to an astounding 10 kg/capita by the end of the decade.

Australian equity research firm Resource Capital Research (RCR) said it expects the copper market to move from a small surplus in 2010 to a deficit of around 400,000 tonnes by 2011. According to JPMorgan Securities Ltd, the world refined copper market will have a 500,000-metric-ton deficit in 2011. The International Copper Study Group said global demand for copper will rise by 4.49% in 2011. Supply disruptions have cancelled out modest mine supply growth.

A glance at the following two charts confirms the growing demand for copper while inventory levels at the London Metal Exchange hint at the supply deficit.

Follow

With metal analysts calling for a 10-30% rise in the 2011 copper spot price, you could probably make money buying shares of JJC-iPath – an index composed of copper futures contracts traded on the New York Commodities Exchange (JJC is up 50% in the last 6 months).

Or you could buy shares in one of the big multi-national copper miners. Freeport McMoran (FCX-NYSE), BHP Billiton (BHP-ASX) or Xstrata (XTA-LSE) are up a collective 58% in the last year.

But to make the big gains, you have to get in ahead of the money flow. Potash has recently given us an excellent example on how to do that and what signals investors should watch for as the process plays out.

Potash is the primary ingredient in fertilizer, it’s also a mined resource with global demand being driven by a macro trend. What’s been happening is a trickledown effect and is a three phase process:

PHASE#1: a barrage of bullish headlines in the mainstream media:  “Potash Profits Up” “Spike In Food Prices Bullish For Potash” “Potash Export Prices Rising” etc.

PHASE#2: a flood of investment dollars into the senior potash companies. Potash Corp (POT-NYSE), Agrium (AGU-NYSE) and MOSAIC (MOS-NYSE) are all up about 120% in the last 12 months.

PHASE#3: Snowballing investor interest in the “junior” (smaller cap) explorers. This third phase is typically riskier and more profitable than phase #2. Nine months after the potash majors began their climb, Amazon Mining (AMZ-TSX), Encanto Potash (EPO-TSXV) and Western Potash (WPX-TSX) all caught fire – catalyzed by news stories of food price inflation. In the last three months all three aheadoftheherd.com sponsor companies have seen stock price increases an average of plus 200%.

“You’re seeing a catch-up phase, there’s capital flowing into the sector and it’s moving down into smaller-cap names.” Robert Winslow, Wellington West Capital Markets

Copper has just completed phase #1 (a barrage of bullish headlines), and phase #2 (the majors have had their run).

Phase #3 is about to begin.

VMS Ventures, Copper Fox, Far West Mining, Hana Mining, Nevada Copper, Redhawk Resources and Western Copper are all good companies seemingly well positioned to benefit from this next phase.

Catalyst Copper

I am going to single out one company, Catalyst Copper TSX.V – CCY, that appears to have everything going for it – including a “tell” in the fundamentals that suggests it may be about to be revalued.

Catalyst has the right to earn 60% of the La Verde Project. La Verde is a Mexican copper porphyry project with NI 43-101 compliant resource of 2.1 billion pounds of Measured and Indicated copper and an Inferred Resource of 1.3 billion pounds of copper.

Catalyst Copper is currently earning into a 3.4 billion pound copper deposit that remains open in all directions. Today their 60% share would equal 2 billion pounds of copper – 9.6 pounds per share – the current spot price of copper is $4.46/lb. With Catalyst currently trading at .22 an investor would be buying copper in the ground for .02 a pound.

Catalyst Copper, partnered with Teck Resources TCK-TSX, has commenced an aggressive 20,000 meter drill program for 2011.

Catalyst CEO John Greenslade just raised $850 million for Baja Mining and he is on record as stating that CCY is a “more straight forward project”.

But here’s the tell: for the last year CCY has traded about 500,000 shares a day. A lot of that trading is “seed stock” changing hands. Since February 1, 2011 – the average daily volume has jumped to about 1,840,000 – while the stock has risen to .22.

180,000 people a day move from the country to the city. Urban infrastructure devours copper. Over the next 12 months that demand might drive investment dollars into juniors with big resources like Catalyst Copper.

Are there copper juniors on your radar screen?

If not, maybe there should be.

Richard (Rick) Mills
rick@aheadoftheherd.com
www.aheadoftheherd.com

If you’re interested in learning more about the junior resource market please come and visit us at www.aheadoftheherd.com

Membership is free, no credit card or personal information is asked for.

***

Richard is host of www.aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 200 websites, including: Wall Street Journal, SafeHaven, Market Oracle, USAToday, National Post, Stockhouse, Lewrockwell.com, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor and Financial Sense.

Copper inventories at the London Metals Exchange have reached a 7-month high as high.

US factors remain mixed. The recent CPI came in at 0.4% (monthly increase) which was surpassed expectations. The US recovery, is ‘firming’ according to the Federal Reserve. We say its firming unless you are unemployed, as high unemployment is ‘firming.’ Furthermore, the Federal Reserve believes inflation is too low despite record commodity prices.

Turning to the chart, we see that Copper has twice failed at $4.65. It soldoff down to $4.42 today though has made a nice recovery. In the very short-term, $4.45 is support while $4.55 is resistance. If Copper can takeout $4.55 then it has a chance to retest $4.65. Last week we noted the bullish breakout from January’s consolidation. Now the market is struggling when it shouldn’t.

We constantly hear about Chinese demand. Is it really demand or is it stockpiling for the future? In other words, is it current or future demand? Traders and investors must keep an eye on the stockpiling factor.

Meanwhile, Morgan Stanley considers Copper its favorite commodity due to its “bullish supply and demand fundamentals.” It notes demand from both China and the developed markets while saying that there could be substitution in the medium term as Copper relative to Aluminum is overvalued.

Turning to the technical side of the market, we note that sentimentrader.com shows 60% of the public as bulls on Copper. Clearly that could rise 10-15% points. Open interest and the speculative long position are fairly high but below recent highs.

The chart shows Copper breaking out from a bullish flag consolidation pattern. The flag was $0.80 and the upside target is $0.80 from the breakout point of $4.45. This gives a potential upside target of $5.25. Over the last few days Copper has held above $4.50, but has yet to close above $4.60. Traders need to be nimble. On the one hand there is potential for continued upside and possible acceleration. At the same time, they need to be wary of a reversal brought on by a potential shit in inflation expectations or growth expectations.

Yeh, I have fun sometimes.  Chart was within the bullish looking consolidation flag when the below was written.

Bull market: “Tell me Doc, am I gonna live?” Doctor Copper: “Well my good man, as
you can clearly see, I am taking a brief respite above critical long-term, all time highs
breakout support. I shall endeavor to let you know at such time as I decide what to do
next. I prescribe Bear bile for what ails you my good sir.”

http://www.biiwii.blogspot.com
http://www.biiwii.com

Throughout 2010, stockpiles of Copper (at the LME) declined. This condition reversed in December of 2010. Nonetheless, there is a long way to go to rebuild what was roughly a 37% decline in stockpiles.

Copper has held its gains in spite of interest rate increases in China. The very inflation Copper has benefited from is now forcing China and other emerging nations to tighten policy. Inflation is a politically sensitive issue in these regions due to the potential for food riots.

Public opinion from sentimentrader.com shows 56% bulls on Copper. The futures market should concern bulls as the speculative long position is at a five-year high while open interest is commensurately high.

Copper is in breakout mode but the market has a host of mixed factors to digest. On the one hand there is the potential for an improving economy in the US. However, inflation and tight policy could rear its ugly head in China.

Turning to the chart, we see that $4.20-$4.25 as near-term support while $4.45 is near term resistance. A daily close above $4.45 would qualify as another breakout. With the market in all-time territory and holding $4.25, one has to give the bulls the benefit of the doubt.

This update is the property of CMEGroup.

Copper

As we pen this, Copper for March delivery is trading higher by about 1% to $4.32/lb. Copper has continued to work its way higher in the last month after it reached a new all time high above $4.07/lb. The move past four-year resistance has thus far been sustained as Copper has moved another 5%-6% higher.

In other news, the London Metal Exchange reported that a single trader holds 80%-90% of its stockpiles, which equals half of all the exchange-registered supply in the world. The position is worth $3 Billion. Sources say its JP Morgan, who owns the position on behalf of clients. Regardless of who holds the actual position, it clearly adds potential volatility to the market. Some hearken back to the Hunt brothers and their attempt to corner the Silver market.

Heading into 2011, most analysts are optimistic. BMO Capital Markets is looking at Copper as its commodity of the year in 2011. BMO projects a deficit of 380,000 metric tons. Standard Bank projects a deficit of 385,000 metric tons, growing to 562,000 in 2012. BNP Paribas is looking for a deficit of 200,000 tons in 2011. Goldman Sachs expects accelerating demand and shrinking stockpiles to propel Copper to $11,000 per tonne ($4.99/b) in 2011.

Its interesting to note how analysts seem to ignore macro-related issues. Two-years ago, Copper was trading below $1.50/lb. Since then China’s growth has accelerated while US growth has remained well below trend even amid quantitative easing and federal stimulus. Does that sound like a case for a tripling of the price of Copper? Now, factor in sovereign debt issues in Europe, a weak US Dollar, massive federal spending and two rounds of quantitative easing. Sounds like the macro issues had more of an impact then specific supply/demand issues.

Heading into 2011, investors will have to weigh those macro issues. Will China’s tightening curb growth? Will rising interest rates in the US reduce growth even further? Or, will rising interest rates in the US force even more debt monetization and an even weaker than expected US Dollar? Hence, we figure that Copper could continue to be held hostage to macro forces.

Turning to the chart, we see that the market rallied past $4.20 and retested it successfully. The path of least resistance continues to be higher.

Platinum

Platinum for January delivery is nearly $22 higher to $1757/lb. Today we are seeing strength across the board in the metals complex.

Heading into 2011, analysts are more bullish on Palladium then Platinum. Palladium is up 82% year to date while Platinum is only 16% higher. It is amazing how professional analysts will simply follow the herd. One thing to note regarding Platinum is the potential for supply shocks. South Africa supplies about 80% of the world’s Platinum. Platinum is higher on the year but the Rand is higher by about 9%. This means that the price for most producers is not sufficiently higher than one year ago. If the Rand continues to be strong, than output could be affected.

While Commodities have had a strong run the last seven months, Platinum has actually dramatically underperformed Commodities, industrial and precious metals.

Turning to the charts, we note that Platinum, throughout 2010 formed a cup formation. A cup with a small consolidation is known as a cup and handle. This pattern is frequently occurring and one of the most reliably bullish patterns. The pattern projects to $1950/lb. The longer-term charts show resistance at $1900. A weekly close above $1760 would constitute an important breakout. Platinum appears to have strong demand at $1720-$1725/lb.