An interesting interview in The Gold Report last week lays out a middle way between the commodity super cycle camp and the boom, bust and now back to the way life was before camp. Interviewing Gianni Kovacevic, corporate development strategist at Global Opportunities AG, the article explores Kovacevic’s proposition that the long term price for copper is now likely to be $2.00-2.50/lb, ($4500-5500/metric ton) as opposed to the $1/lb that was the long term average for 30 years before this decade. He illustrates his argument with an amusing example of the price of Big Mac’s and gasoline historically and today. Before this decade’s super cycle, the average price of copper was $1/lb and so was the price of a Big Mac and a gallon of gas. Now a Big Mac is $3.00, a gallon of gas is $2.50-3.00 and copper is $2/lb. The gist of his argument is that the world has changed and we should wake up to the new balance. This will not come as news to any of the super cycle proponents but what we liked was the balance in his argument that said this doesn’t mean the price will return to $8000+/ton, that was a bubble and for the foreseeable future there is sufficient copper reserves of accessible grade to mean new mines can be brought on stream at current costs to make $8000/ton unnecessary. Only when current grades are exhausted will the price need to rise to support extraction of lower and lower grades, but that is some way off. In the meantime, the aspirations of 3-4 billion people in the developing world will continue to maintain an upward pressure on the available supply such that prices do not collapse back to $1.25-1.50/lb ($3000/ton).
For those interested in estimates of the real drop in demand, Kovacevic goes on to do some rough calculations due to reduced car production as an example which we will not look to replicate here but the article makes interesting reading providing you keep in mind that Kovacevic’s focus is as a long term strategist. He is not much interested in short term trends so his assertion that prices will settle in the $2.00 to 2.50/lb range is a longer term average, not a short term prediction.