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Copper Stocks Show Their Mettle

21 October 2015 in Trading Ideas

It’s been tough sledding this year for most commodities, and copper has been no exception. As worries over the health of the global economy – and particularly China – began to grow this year, the metal’s price began a four-month-long nosedive in May, ultimately losing about 25%.

Recent developments, however, have helped copper bounce back, bringing hope to investors in copper stocks that a longer-term rally could take hold.

The Dr. Copper motif has fallen 1.1% in the past month. In that same time, the S&P 500 has gained 3.9%.

Over the past 12 months, Dr. Copper has declined 33.1%; the S&P 500 is up 7.8%.

Copper prices remain near a three-week high set earlier this month, sparked in part by broader supply cuts by Swiss miner Glencore that triggered a buying spree in industrial metals.1

Switzerland-based Glencore PLC said it would cut its annual zinc output by about 500,000 metric tons, the Wall Street Journal reported — the latest in a string of mine closures by the company as it attempts to cut debt and repair its balance sheet.

“The market is a little spooked by what’s going on with Glencore,” Bob Haberkorn, a senior commodities broker with RJO Futures, told the Journal. “There’s concern about what’s to come from them on copper given the fact that they’re cutting back on zinc production,” he added.

In September, Glencore announced initial cuts to copper output, suspending two large mines in Africa and removing about 500,000 metric tons of annual supply from the global market.

“The market is adjusting to a world of less copper,” said Frank Lesh, a broker and futures analyst with FuturePath Trading. “You have a perception now that we may have seen the worst in commodities prices,” he said, adding that crude oil and metals recovered from multiyear lows set this summer.

That we’ve-touched-bottom theory is also echoed in a couple of recent big M&A deals that saw large investors boosting their bets on copper.

US private equity giant KKR & Co L.P. (NYSE:KKR) recently doubled its stake to 10% in struggling Australian miner Oz Minerals Ltd.2

Following the purchase, KKR said simply, “We think that Oz Minerals is a good company that was undervalued in the public markets when we made our investment. We thought it was a good time to accumulate exposure to Oz Minerals shares given the environment.”

Couple that deal with another recent transaction: Chinese-owned Guangdong Rising Assets Management took over another Australian copper miner PanAust Ltd. The takeover comes after PanAust acquired a majority stake in one of the largest untapped copper deposits in Asia, the Frieda River copper-gold deposit in Papua New Guinea.

To be sure, the stability of the global copper market is far from certain. Earlier this week, the Wall Street Journal reported that recent stock-trading restrictions in China have pushed investors there into copper trading, as they seek avenues to bet on a deepening slowdown in the world’s second-largest economy.3

Spikes in activity on China’s main commodities exchange have coincided with a period of heightened volatility in copper prices and are driving copper-trading volumes worldwide. Global volumes are on track to hit a record high this year, with traders in China accounting for the largest share.

With copper prices up more than 5% in the past three weeks, though, some investors may find the opportunity for a further rally worth the risk.

1 Ese Erheriene and Tatyana Shumsky, “Copper Climbs to Three-Week High on Glencore Supply Concerns,” wsj.com, Oct. 9, 2015.

2 Bob Kohut, “A Bullish Buy for Copper Stocks,” thebull.com.au, Oct. 12, 2015, http://www.thebull.com.au/premium/a/56061-a-bullish-buy-for-copper-stocks.html, (accessed Oct. 19, 2015).

3 Tatyana Shumsky, “Chinese Copper-Trading Surge Shakes Up Market,” wsj.com, Oct. 18, 2015.