Much copper market strength resides in nations other than the U.S. and China.  The CRU estimates global copper tube output up 5.4%, as gains in air conditioners and refrigerators offset housing declines in the U.S. or southern Europe.  The CRU estimates copper alloy rod and bar is up 30.6% worldwide.  Japanese copper rod and bar is up over 70%, European copper rod and bar is up over 40% and German copper tube is up over 40%.  The Big Six diversified mines, FCX, ANTO and small caps like Quadra FNX, Capstone Mining, Duluth Metals, PolyMet, Mercator and others benefit from higher copper prices.
 

·                     The odds of regional copper shortages rise as copper exchange inventories are quite low at 48,000 in Europe and about 160,000 in Asia of the 597,541 tonne total.  The 32 week copper inventory build averaged about 13,000 tonnes per week in July 2009 to February 2010, and the absence of buildups in July and August “exposes” the market to shortage risks next Spring 2011 or if China re-enters the market to buy copper.  Aluminum, nickel and zinc have  larger inventories and little 2011 shortage risks, while lead and tin stocks are less. 

 

            World Gold  Council data reported August 25th showed that various forms of investment demand were 51% of June quarter gold demand.  Precious metals are ebullient as investors returned in August.

 

            In contrast, nickel markets appear softest with inventories rising now that Vale settled its Ontario strike.  Exchange inventories of various nonferrous metals create a fairly safe buffer stock for nickel, aluminum and zincin particular. Iron ore and met coal show some softness with a 10%  drop in world steel output since April.

 

            We take a non-consensus bear view of containerboard, and recent data supports our view.  We believe consumers have built inventories to beat back price hikes at the current seasonal peak.  July data suggests that domestic demand supports only 76% or  77% of the 98% operating rate as 5.3% went to inventory,  6.2% went to "unidentified uses" and 9.7% were exported.     July Fibre Box Assn. data reported a 2.2% decline in July 2010 corrugated box square footage compared to last year, and the YTD gain through July fell to 3.2% from 4.4% owing to the July softness.  While containerboard mills ran at 98% of capacity in July in the U.S., they built 160,000 tons of inventory.   We rate IP Underweight and Temple-Inland, Packaging Corp. of America and Smurfit-Stone Container each Neutral.   Our forest products sector Overweights are MeadWestvaco and Domtar owing to modest valuations of free cash flows and dividends.

 

 Faithfully,

 

John C. Tumazos, CFA