Thieves in the Night

There’s got to be an easier way to make money than stealing air conditioners.

I mean, those outside compressor units are big, honking machines that are typically bolted to the concrete pads on which they rest. And yet, air conditioning theft is a common problem, particularly in states with large numbers of empty homes… like Florida.

People show up in the middle of the night, cut the connecting wires and hoses, and then haul those massive units away.

But they don’t do it because they intend to sell the units whole. Nope, this is more like a chop shop that steals cars and strips off the pieces.

Air conditioning units are stolen because they contain an awful lot of what is now an expensive metal – copper.

And it doesn’t stop there.


Thieves will also break into vacant homes and steal the copper wiring from the walls, and the copper tubing in the bathrooms and kitchens.

Unfortunately, sometimes the thief doesn’t even break in. He simply uses his key, because sometimes homeowners will gut a home before they give it back to the bank under a foreclosure.

It’s not pretty, but it happens.

It didn’t used to be like this. Then again, copper wasn’t always expensive.

The red metal is a key ingredient in building, particularly in plumbing and wiring. As the construction market heated up in the U.S. and around the world in the 2000s, copper moved higher in price, up from about $1 per pound to more than $3 per pound. Along with increasing prices came increasing incidents of theft. It’s easy. All you need to steal copper is a few tools, a strong back, and the ability to haul it away.

Then came the downturnrn…

After 2008, the price of copper fell dramatically, back below $2 per pound, as all types of building ground to a halt. The sudden stop in construction sent shudders through many of the commodity markets.

However, the resulting central bank actions sent the metal back up again, a move that was exaggerated by the rebounding Chinese economy, where copper is both an industrial metal and a storehouse of value.

You see, in China, a person or business can pledge copper as collateral for a loan. This double use – a storehouse of value and as an input in construction – gave the copper market quite a boost after the financial crisis, elevating the price of copper… even as building in the U.S. and Europe dried up.

The price of copper soared back to nearly $4 per pound. The result was a lot of expensive copper in empty homes and a lot of people out of work… a recipe for vandalism and theft!

But lately the price of copper has fallen back down to earth, settling in the low $3 range. This is strange because it comes at the same time that the U.S. housing market has bounced back a bit, with many people (not us, mind you) calling for a rapid rise in new construction.

With such a tailwind, how could copper fall in price instead of marching higher?

Again, it is all about demand in Asia.

While there is still massive construction taking place in China, the pace has cooled somewhat, so the demand for copper has cooled as well. At the same time, the Chinese governrnment has taken aim at a financial shenanigan that holders of copper commonly engage in, called rehypothecation.

That is a fancy way of saying, “Loan it again, Sam.”

In the financial world when something is pledged as collateral it is hypothecated. To rehypothecate is to take something that has been pledged to you as collateral, and then pledge it as collateral to someone else for your own loan.

The danger in this is immediately clear.

If a ton of copper can be pledged as collateral for a loan, or hypothecated, and then rehypothecated for yet another loan, then it’s possible that an infinite number of loans could be based on a single ton of copper.

If any single borrower defaults, then the copper is removed from the system and every other loan is called. If two borrowers default, then one of the lenders will be left high and dry because there was, and remains, just a single ton of copper.

The Chinese governrnment is working to cool the hypothecation – and therefore the rehypothecation – of copper, so it’s limiting the ability to use the metal as collateral. This is causing a slowdown in the import of copper because much of the internrnal supply can now be sold to end users instead of being tied up in collateral arrangements.

At the same time, there have been a series of reports showing weakness in Chinese manufacturing. Given the varied industrial uses of copper, such a slowdown would certainly mean less demand for the metal. The fact that China is responsible for 40% of the world’s copper consumption makes this a big deal.

The end result of all this is that copper should trend lower in the weeks and months ahead as the collateral trades unwind and the slowdown in Chinese production works through the system.

This is bad news for countries that export copper. And, of course, it’s bad news to people who steal air conditioners in the middle of the night.


P.S. Copper is not the only commodity we see suffering in the months ahead. Harry will discuss this in his mid-year Forecast Update video this Friday, along with reasons why commodities are done for now, where to next for the Dow and S&P 500, what to expect with interest rates and stimulus efforts ahead. This is a must-watch if you have any hope of surviving and prospering during the second half of 2013 and beyond. To view this video on July 5 at noon EST, simply add your name to the broadcast list.


Ahead of the Curve with Adam O’Dell

We’ve Seen This Patternrn Before

Three dollars per pound, without a doubt, is the line in the sand of the copper market.

Rodney Johnson

Rodney’s investment focus tends to be geared towards trends that have great disruptive potential but are only beginning to catch on to main-stream adapters. Trends that are likely to experience tipping points in the next 5 years. His work with Harry Dent – studying how people spend their money as they go through predictable stages of life and how that spending drives our economy – helps he and his subscribers to invest successfully in any market.