Portfolio Manager Sees Big Potential For Copper Prices To Decrease In The Short Term: Chinese Massive Copper Imports Not Sustainable
February 8, 2010 - The Wall Street Transcript has just published Gold & Precious Metals, Base Metals and Non Metals Mining Report offering a timely review of the Precious Metals sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Gabor Szocs is a Portfolio Manager with Concorde Asset Management, where he is responsible for managing energy-related equity investments, including mining, power, and oil and gas. Mr. Szocs is a graduate of the Corvinus University of Budapest.
TWST: What are your coverage areas?
Mr. Szocs: As an equity portfolio manager, my coverage area is quite widely focusing on the energy and commodity universe. I concentrate on the oil and gas sector, both upstream and downstream. From the upstream, I cover the U.S. companies like Conoco (COP) and Central/Eastern European-based ones, like OMV (OMV) or MOL (MOL.BDP). In the downstream segment, I also try to have a global grip. I track U.S. refiners Tesoro (TSO), Valero (VLO), and Western and Eastern European refineries Petroplus (PPHN.VX), PKN, Tupras (TUPRS.IS).
I also deal with the CEE metals and mining sector, mainly copper and coal. Last but not least, the European power utilities CEZ (BAACEZ.PR) and RWE (RWEOY.PK) also belong to my area. As in most cases, the underlying commodity is the number one, and I put large emphasis on the analysis of the commodity fundamentals oil, natural gas, coal, electricity, copper, etc. I believe gold provides a promising investment and a good diversification opportunity with its inflation hedging, and safe heaven identity. It is in the spotlight, too.
TWST: Let's start with copper.
Mr. Szocs: Ok, let's start with copper. There are more important value drivers. First, I believe and hope the most significant are the real economy's demand outlook and the supply-side factors. Second is the appetite of professional and speculative investors, which is gaining significance. Third, the U.S. dollar movements and fourth is the future path of inflation. Let me begin with the first one. Copper is a scarce resource and will definitely face secular demand growth, which is stemming from the emerging market's growing appetite. In countries like China or India, the GDP per capital is improving, which provides backwind for a transforming consumption mix. Families will buy more and more household machines, will start driving cars and build bigger houses. This is evident and hardly any investor would doubt it. This secular demand growth is underpinning a longer-term bullish copper price outlook. However, the shorter horizon is more doubtful and therefore cannot be neglected. Comparing the current status of the real economy's outlook with the current strong copper price shows an ambiguous picture. We saw the developed world's demand falling by 20% to 30% year-over-year - Japan -30%; USA, Europe -20%.
Still the price of copper gained 150% from its trough and stays only 20% far from its pre-recession peek. I think everybody knows that the reason for this is China, and its massive fiscal and monetary stimulus resulting in extreme copper import. China imports two to three times more copper than in the boom years before the recession. I don't agree with those who consider this sustainable; I believe this massive inventory building will come to an end soon and probably before the developed world's economic demand will gain foot. The second important value driver is the behavior and strategy of players who probably will never touch a piece of copper rod in their life - the professional and speculative investors. Professional money managers discovered commodities as a new asset class, and institutions show a willingness to diversify their assets towards them. Professional money, having a longer horizon, can stay for the long run, keeping this trend alive. On the contrary the speculative money, individual investors and hedge funds with shorter time horizons can cause heavy price fluctuations. Question of the day:
Where should we place China's strategic Reserve Bureau? The speed of investment money flows into commodity products, accelerated money allocated into commodity ETFs, ETPs reaching record highs in the case of both copper and gold. The price of copper also depends on the movements of the U.S. dollar; when it is depreciating the price of metals increases. In 2009 almost everything played in the favor of copper. China's and the investing world's demand paralleled with the weakening U.S. dollar. Today a CEO of a copper mining company sitting in his office at the top of a skyscraper is having a good time. The company is reaching very high return on invested capital and booking huge profits. But if our CEO looks outside the window, he should start to feel uncomfortable. He sees record unemployment, consumption levels at ground zero, decelerated credit dynamics, banks sitting on excess reserves spared for further write-downs and higher future capital adequacy requirements. And most importantly, what he sees is a mass of suffering, leveraged consumers. So the divergence is breathtaking.
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