Suddenly, investors in grip of red gold fever

High school rugby coach Bob Markovich paid $3,812 for 250 shares of the Global X Copper Miners ETF in September. He got the idea from an investment club he advises for students, including his daughter Lydia. “It's the right time to buy it, the right time to stockpile it and the right time to own it,” said the father of five, who coaches at Christian Community School in North Eaton, Ohio. His wager -- 21 percent higher to date -- links booming demand in China with supply constraints at world copper mines. Investors are driving up the price of copper and the stocks of companies that mine the metal used to electrify cars, homes and offices. China's consumption will almost double by the end of 2020 to account for 49 percent of world sales, according to CRU, a London-based mining and metals consulting firm. “Copper is red gold,” said Jeremy Gray, global head of resources at Standard Chartered Plc in Hong Kong, predicting copper traded on the London Metal Exchange could rise by almost 50 percent in 2012. “We're on the verge of the biggest commodities bull market we have ever seen.” All but two of 81 new mining projects due to start by 2016 stalled after the 2008 financial crisis curtailed investment, delaying 3.5 million tons of additional capacity, Gray said. He said demand will outstrip supply until at least 2013. Copper is up 14.4 percent this year, with contracts on the London exchange tripling to $8,345 a metric ton since December 2008. Investors are piling in even after warnings from hedge fund manager James Chanos and Harvard University economics professor Kenneth Rogoff that China's prosperity is inflated by a real estate bubble that will burst. Last month, BlackRock Inc., the world's largest money manager, JPMorgan Chase & Co. and London-based ETF Securities Ltd. each announced exchange-traded products backed by copper. ETPs, which can be bought and sold like stocks, give investors access to commodities without having to take physical delivery. “In the last nine months, investment banks and funds have approached us to discuss new ETF products,” said Marcelo Awad, chief executive officer of mining at Antofagasta Plc, the London-traded mining company controlled by Chile's Luksic family. Antofagasta's stock is up 40 percent this year. China's demand for copper is felt around the world, from the blasts at the Cerro Verde mine in the desert of southern Peru to children watching television in the hillside village of Bentang, in Hunan province, which just got electricity in 2008. Low rumblings shake the open pit at Cerro Verde most days. The rock-smashing explosions release energy equivalent to nine space shuttle liftoffs, according to majority owner Freeport- McMoRan Copper & Gold Inc. of Phoenix, Arizona. Management is spending $50 million to increase processing capacity by 10 percent a year, adding 30 million pounds (13,607 metric tons), said John Brack, Cerro Verde's former president. He is now vice president of Freeport-McMoRan's New Mexico operations. “It would be impossible for China to evolve the quality of life without copper,” Brack, 55, said. “We get to provide that. It's pretty cool.” Five to six pounds of ore is produced for each ton of rock processed. Shards seven inches in diameter are crushed and loaded into 480-ton tumblers, where steel balls grind the stone and mix it with water from the nearby Chile River. Chemical reagents and air injected into the slurry attract particles that ride bubbles to the surface. A powder consisting of 25 percent copper is the principal finished product, and workers load that concentrate into urns on rail cars bound for the port of Matarani on the Pacific Coast. In March, a crane operator at the Port of Nanjing on the Yangtze river unloaded a 21,000-ton shipment from Cerro Verde. “Shipments of concentrate have risen almost 10 times at the port over the past decade,” said Cheng Yuming, a dock hand who owns two apartments. From Nanjing the ore moved to a mill belonging to Jiangxi Copper Co. in Guixi City, 1,100 kilometers (684 miles) to the west. The company smelts the powder into metal plates that go to makers of electricity-conducting wires and rods. TBEA Co., among China's largest suppliers of electricity equipment, uses plates in transformers and reactors. TBEA recently installed a 500-kilovolt reactor, containing 15 tons of copper, in Hunan province. In Bentang, “gushing pond” in Mandarin, villagers had pooled their savings in 2002 to buy 68 cement poles on which to string wire to carry electricity. Sixteen townsfolk shouldered each pole up the brush-covered hillside -- but they couldn't afford the cables and transformers required to connect them to the regional power grid. They waited six more years, raising the money from sales at the local Qiaotou Forest Farm. “We used to spend hours cutting wood in the mountains in order to cook,” said Xiong Changfang, inside his home, where three light bulbs burn. “With electricity, we can use our time better, where more money can be made.” Eight villages in the forest still have no power. “We are looking at a copper market globally that is going to really struggle to keep up with the demand needs, and, in particular, the demand needs of China,” said Barclays Capital metals analyst Gayle Berry in London. In October 2007, just as China stepped up its buying of reserves from foreign companies and governments, Barclays introduced an exchange-traded note linked to copper futures prices. The note has gained 11.3 percent this year compared with 7 percent for the S&P 500 index. In March, Wheaton, Illinois-based First Trust Advisors LP introduced an exchange-traded basket of mining stocks, the First Trust ISE Global Copper Index Fund. It has risen 24 percent to date. Five weeks later, New York-based Global X Funds launched its copper miners product, which is up 17.3 percent. BlackRock's iShares Copper Trust plans to raise about $1 billion to buy physical copper, according to its Oct. 26 registration statement filed with the Securities and Exchange Commission. The J.P. Morgan Physical Copper Trust registered Oct. 22 plans to raise about $500 million. “Physically backed ETFs have become the gold standard for investing in metals,” said ETF Securities' managing partner, Will Rhind, ETF's head of sales and marketing in the U.S. Markovich, the rugby coach, is also managing partner of Grand Rapids, Michigan-based Nav Capital Partners LLC, which distributes exchange-traded products. Nav Capital began marketing Global X funds this month, Markovich said. Working out of his home in Sheffield, Ohio, he manages his own portfolio. He decided to invest after the seniors he advises in his daughter's economics class debated buying stock in Bentonville, Arkansas-based retailer Wal-Mart Stores Inc. That made Markovich think of the Chinese factories that supply so many consumer goods, from Android phones to IPods. “He said, ‘Christmas is coming, incomes are down, so I think more people will be driven to Wal-Mart,” Markovich said. “It hit me: I'm teaching these kids about supply and demand and they're thinking about buying Wal-Mart. I should be doing that with copper.”