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Copper Makes a Comeback

11 July 2014 in Trading Ideas

Investors in copper stocks have seen better years, but in recent weeks the metal has not only shown serious signs of life — but has many analysts expecting even more upside.

This week, copper prices were sitting near four-month highs, recouping almost all of their losses from early June, when news broke that Chinese authorities were probing allegations that a trading company in Qingdao had taken out numerous loans against the same stock of metal, suggesting prices were somehow subject to serious manipulation.1

This news had investors taking a bullish turn toward copper investments again, which have performed well recently. The Dr. Copper motif, which comprises a portfolio of eight copper mining stocks, has gained 7.7% in the past month. During that same period, the S&P 500 has returned 0.8%.

So far in 2014, the motif has increased 6.5%; the S&P 500 has risen 8.3% this year.

In recent weeks, optimistic investors appear to be more focused on a rebound in worldwide manufacturing, which they expect will boost copper demand, according to a recent Wall Street Journal article. These investors anticipate that increasing consumption by factories will offset any decline in the use of copper as collateral to back loans as a result of the Chinese investigators.

China is the world’s biggest copper consumer and importer, but as the Journal points out, how much of the metal goes to manufacturers is unclear.

However, much of it likely does, so investors appeared more willing to bet on higher prices following data that showed China’s manufacturing sector grew in June for the first month this year. Similarly, investors in the US, which is the world’s second-largest consumer of copper, have been buoyed by improved US economic data, the Journal said.

In addition, the Journal noted that copper may be playing catch-up in its performance with other industrial metals, the prices of which have jumped in recent months on expectations of higher demand. Copper is still down about 6% this year, compared with zinc, which is up 6%, and aluminum, which has risen 4%.

The prices of most metals are still well below where they traded before the financial crisis.

China’s economic indicators, the Journal said, have improved since the government’s adoption of a “mini-stimulus” that targeted the industrial sector in April.

In the US, metal-intensive sectors of the US economy have shown signs of bouncing back from a slow winter. Recent data showed new-home sales by unit volume hitting a six-year high, while manufacturing activity increased for a fourth consecutive month.

Of course, these economic trends are not a given and enough uncertainty exists to give some investors pause. Some analysts also say they expect economic growth in China to slow once the stimulus ends.

However, for those more bullish on global – and Chinese – economic growth, investing in copper has recently proven to be a worthwhile endeavor.

1Ira Iosebashvili, “Copper Prices Seen Marching Higher,” WSJ.com, June 30, 2014.

Tags: Dr. Copper