Copper & Chile Update.

Alpaca in Chile. Photo by James Heilman. Wiki Commons. Used with permission.

Chile is suffering from the highest pandemic infection rates in the world. Copper prices tend to plunge in recessions. How will this play out in 2020 and beyond?
 
Historical Prices of Copper
Copper hit its all-time high price in 2011, when it spent the first part of the year trading near $4.50/pound. Today’s price has rebounded from the recent March 23, 2020 low of $2.17/pound, back to $2.80/pound. It is still far from the lofty heights of 2011. Additionally, as you can see from the chart below, copper prices tend to tank in recessions. The low hit in December of 2008 was $1.32/pound. So, will copper prices continue to weaken in 2020?
 

20-year chart of copper prices. Source: MacroTrends.net.

Global Recession
As you can see in the GDP Map of the International Monetary Fund (below), Chile is expected to contract by -4.5% in 2020. That’s not as severe as the current expectations for the U.S., which is a contraction of -6.5% (source: Federal Reserve). Most countries in the world, outside of Vietnam, China, some African nations and Guyana in South America, will experience an economic contraction in 2020. There is a hope that 2021 will see a turnaround, with GDP rising by 5.3% in Chile and 4.7% in the U.S. By comparison, China’s 2021 rebound is projected to be 9.2%, with Vietnam’s GDP growth at 7%. Both China and Vietnam are predicted to stay in the black for 2020.

2020 GDP projections by country. Source: IMF.org.

2020 Pandemic
Chile is suffering through one of the worst COVID-19 outbreaks in the world. While Peru has shuttered its mines, Chile has kept many businesses up and running, according to Reuters. The Mining Journal is reporting that Codelco, the state-owned mining operation, has reduced its workforce by a third, and has closed some mines in vulnerable regions. All of this will weigh on Chile’s economy in the medium-term, as already noted above in the expected economic contraction of -4.5% in 2020.   
 
 
Will Copper Supplies Tighten Up?
The work stoppages in South America, Zambia and Mexico are contributing to a tightening in the copper concentrate market, according to Colin Hamilton, the head of commodities at BMO Capital Markets. Tighter supplies, along with solid demand, particularly from Chile’s largest customer – China, tend to result in higher copper prices. Since the 2021 recovery (like so many before) will rely upon government financing, we’re likely to see infrastructure projects. That bodes well for Chile over the long-term, as the company is rich in many natural resources. Copper has many practical uses that are essential to modern living. Chile is also rich in lithium, which powers our computers, electric vehicles and transportation.

Copper can be the best performer, shooting first out of the gate, when the contraction hits its trough. Copper prices rallied over three-fold in the wake of the Great Recession. The iShares Chile Fund (symbol: ECH) soared from $29/share to $80/share between November 2008 and December 2010, far outperforming the Dow Jones Industrial Average. Companies like Rio Tinto and BHP Billiton, which own copper mines in Chile, saw similar share price gains. Over the same time period, the DJIA gained only 30%. ECH is currently down below the lows it bottomed out at in the Great Recession. So, has ECH already been oversold. Has the recession already been priced in? Are there other factors to consider?  
 

iShares MSCI Chile ETF performance 2008-2020 (in blue), compared to the Dow Jones Industrial Average (in gold). Source: MNS.Money.com. (c) 2020 Microsoft. Used with permission.

If you are tempted to dump your Chile ETF because it has underperformed, or to buy Tesla at an all-time high, then you might be suffering from Buy High, Sell Low Syndrome. With that, you’ll always be on the wrong side of the trade. A better strategy is diversified and annually rebalanced. When your Chile fund doubles or triples, you trim it back to where it should be. When it slims down to a sliver, you consider buying more low, or using a dollar cost averaging plan during the recession.
 
I’ll be posting a blog on Dollar Cost Averaging in the Recession soon. In the meantime, if the above paragraph speaks to you, be sure to read my blogs on Buy High, Sell Low Syndrome and Annual Rebalancing. Using the pie chart system properly means that you take the emotions out of investing, as they are often prompting you to do the exact opposite of what you should be doing.
 


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Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.

ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.  

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