Copper has had a tough few years: In 2012, the red metal only rose 4 percent, although this was an improvement over 2011’s decline of 21 percent. Back then, I discussed how negative economic news and concern over global growth weighed on the price of copper, yet supply was also lower than expected due to weather delays, poor deposit grades, worker strikes and mill problems.
With an improving global economy and China’s new leadership ramping up projects, will base metals, such as copper, head higher?
China has been the largest consumer of copper for more than a decade now, so we look to the country’s imports of copper to determine where the red metal may be headed. As you can see below, the year-over-year imports into the Asian giant have recently fallen to a new low, until a recent bounce. In January, copper imports rose 3 percent over the previous month.
The recent bounce may mean things are looking up for the metal. A measure that has “proved to be a reliable leading indicator” of copper’s continuing strength is the material inventory sub-index within the Purchasing Managers’ Index, according to Macquarie Research. The sub-index tracks the inventory of raw material inputs to manufacturing and rose above the expansionary threshold of 50 for the first time since April 2011. This suggests that “stocks are now being built up,” says Macquarie.
China’s not the only reason copper prices may improve. Emerging markets account for about 30 percent of base metals demand, and as the largest economies recover, so should the prices of these metals, according to BCA Research. But of the base metals, the ones that have the most potential upside are nickel and copper, says BCA. “Both benefit significantly from infrastructure spending, rebounding construction and rising white goods demand in China,” according to the research firm.
On the supply side, copper looks favorable in the shorter term because of its tight market and low inventory, says BMO Capital Markets. “The copper market appears to be heading for a deficit position again this year,” as mine supply is forecasted to grow only 5 percent. In addition, BMO indicates that miners are estimating growth may be lower than that. There’s only a minor deficit in the copper market currently, but challenges such as water or labor shortages, ore depletion and environmental regulations limit the supply growth, says BCA Research.
The Global Resources Fund seeks to take advantage of the potential strength in copper by investing in companies that mine the metal, such as BHP Billiton and Southern Copper. As of December 31, 2012, the fund had a 12 percent weighting in base and industrial metals stocks. See the fund’s other weightings.
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