Copper is King

Copperfinger doesn’t have the same ring as Goldfinger. Nor would you be very impressed by a man with a copper gun.

Copper isn’t glamorous. Unlike gold, it is not likely to be recommended as an investment by Glenn Beck. Yet, before and after the financial crisis, copper has been one of the world economy’s star performers.

Sure, you were smart if you bought gold at the bottom of the financial crisis, back in February 2009. With gold touching a record $1,500 an ounce last week, you’re up 75 percent. But if you’d bought copper, you’d be up 181 percent.

Today the world’s copper mines are booming. I spent several hours last Tuesday sweltering nearly a mile underground at the huge Konkola mine near Chin-go-la in Zambia. It’s a powerful symbol of the new economic world order. The miners are Zambians. The technical guys are (white) South Africans. The owners and managers are Indians.

Like most Zambian mines, this particular one was not viable with prices below $2,000 a ton, as they were between 1997 and 2003. But with copper up to about $9,400, it makes sense to sink new shafts to reach the deepest ore, even though it means dealing with prodigious amounts of underground water.

Here, where the mighty mechanical drill bores into the wall of the most recently blasted stretch of tunnel, is the sharp end of the world economy. When you switch on the light, it’s copper wire that conducts the electricity to the bulb. Chances are the hot water that came out of your shower this morning arrived there through a copper pipe. From the corrosion-resistant copper carbonate that makes the Statue of Liberty green to the circuit board in your computer, the brown metal is as practical as the yellow metal is precious.

So just why has copper been trumping gold as an investment? The answer is partly that the extraordinarily loose monetary policies adopted by Western governments to combat the financial crisis have driven up the prices of nearly all commodities.

But the key to the copper story is soaring Asian demand. Asians want modern houses with Western-style wiring and plumbing. They want cars. They want electronic gadgetry. So they want copper. In 2005 China accounted for 22 percent of global copper consumption. In 2009 the figure was 39 percent. Try as they may, the copper miners can’t keep pace. And the supply of copper in the world isn’t limitless. Indeed, if the rest of the world were to consume at just half the American per capita rate (1,389 pounds in an average lifetime), we’d exhaust all known copper reserves within just 38 years.

Asians were shocked by the price spike of 2004–08, which saw copper prices quadruple; hence their recent rush to invest in copper mines. The big question now is whether this new scramble for Africa is worsening the disease it was supposed to cure. Rampant Asian demand has once again driven up prices. Higher commodity prices are feeding into higher consumer prices. Inflation in China hit 5.4 percent last month. That makes the authorities nervous. The last thing they want is the kind of popular unrest that was sparked by higher prices in North Africa.

All over the world, central banks are applying the brakes. The European central bank has already raised rates. The Fed seems intent on ending quantitative easing in June. The People’s Bank of China, meanwhile, has not only raised rates but also increased reserve requirements for banks. Remember, this comes as fiscal policy is also being tightened in the developed world—even, belatedly, in the United States. Remember, too, that higher commodity prices act as a tax on consumers in importing countries. Higher prices plus lower growth equals stagflation.

So far these changes have had little impact. But brace yourself. To my eyes, global monetary and fiscal tightening is a clear sell signal for commodities. That could take the shine off copper—and send a blast of cold air down the ventilation shafts of Zambia’s mines.