Copper Zooms to 3-Year High: Will the Momentum Last?

Error Saving Reaction


Copper Zooms to 3-Year High: Will the Momentum Last?

Copper is on a tear, hitting fresh three-year highs thanks to encouraging economic numbers out of China — the world’s biggest consumer of the metal. Renewed optimism about the Chinese economy has given the red metal a fresh shot in the arm.

‘“Dr. Copper” on Fire

Prices of copper for December delivery touched roughly $3.18 per pound on the New York Mercantile Exchange on Tuesday, a level not seen since September 2014. Copper prices on the London Metal Exchange (LME) also hit a three-year high on Tuesday, clocking $6,970 per ton, according to Reuters.   

The widely used industrial metal, nicknamed Dr. Copper for being a reliable barometer to track the health of the world economy, gained from encouraging economic data from China. This raised expectations of higher demand for the commodity.

China's official manufacturing Purchasing Managers' Index (PMI) for August came in at 51.7, up from 51.4 in July and also exceeded expectations. A reading above 50 indicates growth. The better-than-expected August reading came on the heels of strong production and a rise in new orders.

Moreover, China Caixin/Markit services PMI rose to 52.7 in August from 51.5 in July on a pickup in new business orders. These data suggest that the world's second largest economy is in good health notwithstanding a cooling property market and high debt levels.

China maintained the momentum of steady and sound development in first-half 2017, laying a strong foundation for achieving the government’s GDP growth target of 6.5% for this year.

China holds the largest share by far of global copper consumption (roughly 46%), and has a significant share in the total production of pure copper. Trends in Chinese GDP growth and world trade have a significant influence on copper prices. There is a strong correlation of the metal with ups and downs in the Chinese economy. As such, positive economic data are likely to step up the nation’s demand for the red metal.

Another factor that contributed to copper’s rally is a sharp drop in output from Codelco — the world’s biggest copper producer. On Sep 5, the Chilean state copper company said that production for first-half 2017 from its copper operations fell to 798,000 tons from 843,000 tons a year ago.

Copper prices were also supported by a weak U.S. dollar. A weaker greenback makes dollar-priced metals cheaper for holders of other currencies.

The Red Metal’s Rebound

Copper, an important barometer for the global economy, is a major industrial metal that plays a significant role in emerging countries. Trends in the copper market are often a useful indicator of the state of the global economy given the metal’s diverse applications. Developments in the world economy have a strong correlation with movements in copper prices.

After vastly underperforming other metals, copper witnessed a sudden spike at the end of 2016. A pick up in global manufacturing activity and hopes of Trump's infrastructure spending drove the red metal’s recovery. Optimism around the Chinese economy and indications of tighter global mine supply aided prices.

Moreover, supply disruptions at some of the key copper mines including BHP Billiton’s Escondida mine (the world's biggest copper mine) in Chile earlier this year and a strike at Freeport-McMoRan’s Grasberg operations in Indonesia led to a decline in mined copper production and provided a thrust to prices.

Copper received further boost in July on reports of a potential Chinese ban on certain imports of copper scrap by the end of 2018 as part of the country’s move to reduce waste. This would lead to higher demand for refined copper and copper concentrate. While China’s imports of copper scrap increased this year, the country’s demand for refined copper remains depressed. As such, a ban on scrap would result in increased imports of refined copper.  

Moreover, investors are betting on copper as the metal is expected to significantly gain from the booming market for electric vehicles that use a substantial amount of copper in their batteries.

Copper prices are up around 24% so far in 2017 and the metal is trading roughly 50% higher than last year. The non-ferrous metal is among the best performing commodities this year.

The Zacks Non Ferrous Mining industry has also outperformed the broader market in a year’s time. The industry has gained around 31.6% in this period, higher than the S&P 500’s return of around 12.3%.

Rising prices have also given a boost to share prices of copper producers. Mining majors Freeport-McMoRan Inc. FCX and BHP Billiton Limited BHP have both seen their shares shoot up roughly 25% over the past three months.

Moreover, shares of Glencore Plc GLNCY, one of the world’s top copper producers, have rallied around 27% in the same time frame. Southern Copper Corporation SCCO shares are also up 15% while Rio Tinto plc RIO has gained 17%. Rising prices of copper is a good sign for these mining stocks.

While Freeport, BHP Billiton, Rio Tinto and Southern Copper carry a Zacks Rank #3 (Hold), Glencore is a Zacks Rank #2 (Buy) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Will the Rally Last?

While copper has lately been enjoying a stellar run, analysts are skeptical about the sustainability of the recent price rally. Many believe that prices of the metal will come under pressure as the market remains adequately supplied and demand is not strong enough. Some analysts have also cautioned that the markets are overheated and will experience a price correction soon.

Oversupply in the market also continues to pose a threat on copper prices. In the short to medium term, new and expanded production should keep the market well supplied. Chile is expected to contribute significantly to supply growth in 2017.

BHP Billiton, last month, said that production from the Escondida mine is running at normal levels. Completion of a major investment program is expected to significantly boost output from the mine this financial year. Freeport and the government of Indonesia have also recently agreed on a framework that would allow Freeport to keep operating its Grasberg mine — the world’s second-biggest copper mine.

There are also lingering concerns surrounding China’s copper demand. China’s move to tighten credit growth could hurt demand for copper in its property and infrastructure sectors. Beijing's crackdown on risky debt may lead to slower economic growth in the second half of 2017. Any demand weakness in China would put downward pressure on copper prices.

As such, it remains to be seen if the good times for copper stay or passes soon.

One Simple Trading Idea

Since 1988, the Zacks system has more than doubled the S&P 500 with an average gain of +25% per year. With compounding, rebalancing, and exclusive of fees, it can turn thousands into millions of dollars.

This proven stock-picking system is grounded on a single big idea that can be fortune shaping and life changing. You can apply it to your portfolio starting today.

Learn more >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Glencore PLC (GLNCY) : Free Stock Analysis Report
BHP Billiton Limited (BHP) : Free Stock Analysis Report
Rio Tinto PLC (RIO) : Free Stock Analysis Report
Freeport-McMoran, Inc. (FCX) : Free Stock Analysis Report
Southern Copper Corporation (SCCO) : Free Stock Analysis Report
To read this article on click here.
Zacks Investment Research

Views: 181
Author: Regular Articles
Tell a friend
Average rating:
(0 votes)
Average rating from Reviews:
(0 votes)

Write a review


Zacks Industry Outlook Highlights: Freeport-McMoRan, Newmont Mining, Golden Star Resources, Randgold Resources and Kinross Gold

Zacks Industry Outlook Highlights: Freeport-McMoRan, Newmont Mining, Golden Star Resources, Randgold Resources and Kinross Gold Read More

Gold Mining Stock Outlook - Sept. 2017

Gold Mining Stock Outlook - Sept. 2017 Read More

Why Freeport-McMoran (FCX) Stock Might be a Great Pick

Freeport-McMoran (FCX) is seeing solid earnings estimate revision activity, and is a great company from a Zacks Industry Rank perspective. Read More

Friend of slain Georgia Tech student: 'If Scout was more gender-conforming, would it have been different?'

Scout Schultz, a Georgia Tech student, was shot by campus police on Saturday night, and a protest two days later led to arrests. In the aftermath of those events, Yahoo Lifestyle talked to a friend... Read More

How to Make Healthy Leftover Turkey Tacos

These tacos get a healthy makeover by using turkey as the main lean protein. It all comes together with some beans, avocado, and a little cheese. Watch the video to learn how to make this easy... Read More

Little People, Big World's Audrey Roloff Just Gave Birth to Her First Child

It's a girl! Read More

Mel Brooks: ‘Blazing Saddles’ Would Never Be Made in Today’s ‘Stupidly Politically Correct’ Culture

“Blazing Saddles” may be a groundbreaking comedy, but director Mel Brooks doesn’t think Hollywood would make the iconic Western parody in this current “stupidly politically correct” climate. The... Read More

Box Office: 'Kingsman: The Golden Circle' Unseats 'It' as 'Lego Ninjago' Disappoints

Kingsman: The Golden Circle is the new ruler of the box office. The sequel from Fox is expected to earn $39 million this weekend from 4,003 locations. That’s slightly below where tracking had... Read More

Bradley Cooper-Lady Gaga’s ‘Star Is Born’ Moves to May 2018

Warner Bros.’ “A Star Is Born” remake starring Stefani Germanotta (Lady Gaga) and Bradley Cooper, who is also directing, is moving up its release to May 18, 2018. The pic was originally set to open... Read More

White House officials defend Trump, say athletes 'can do free speech on their own time'

Treasury Secretary Steve Mnuchin defended Trump’s call for NFL players who kneel during the national anthem to be suspended or fired. “It’s not about free speech,” Mnucin said Sunday. “They can do... Read More

In wake of U.N. speech, Kim calls Trump a ‘dotard.’ Trump fires back at ‘madman.’

President Trump and North Korean leader Kim Jong Un have unleashed personal attacks on one another after the U.S. commander in chief’s speech at the United Nations. “Kim Jong Un of North Korea,... Read More

As Russia probe turns to fake Facebook ads, Trump follows with a tweet

President Trump continued his efforts to belittle accusations of Russian meddling in the 2016 election on Friday, turning to the latest set of charges, involving targeted political ads placed on... Read More

Reluctant champion: How Nadia Murad has become the international face of Yazidi suffering – and resilience

Weeks earlier, Nadia Murad had been ripped from her village by Islamic State (ISIS) fighters who murdered her family and took her captive. Along with other young Yazidi women, she was transported... Read More

Readers write: The work of downsizing, evidence of climate change, hopeful coverage on famine

Regarding the Aug. 21 Monitor Daily story “Home prices, and a thought shift, give ‘small living’ a boost”: Interesting concept. My friend has done it, downsizing and living in a tiny apartment.... Read More

Time for the world to step up on Rohingya issue, Aung San Suu Kyi’s astounding hypocrisy, Irma’s destruction in Britain’s Caribbean islands, The US should stop saber rattling, On the Nadal-Federer comeback

“It is high time the world made an all-out effort to stop the ongoing pogrom against Myanmar’s minority Rohingya...,” writes Mohammad Amjad Hossain. “The pogrom resembles those crimes perpetrated... Read More