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Pennies From Heaven: Copper Prices Catch Fire

17 August 2013 in Trading Ideas

There hasn’t been much cheering lately from investors in copper and related mining stocks lately, but the metal’s best week in 10 months may pose a signal for bulls to come out of hiding.

Copper prices rose 4.2% for the week ended Aug. 9, and continued to trade near that level this week, putting it within about 3% of its 200-day moving average – a delineating mark above which copper’s spot price hasn’t traded in nearly five months.1

Much of the credit for the rise was given to better-than-expected economic data out of China – specifically, a report from the country last Friday that showed industrial output rose 9.7% in July from a year earlier. That was better than the 8.9% growth in June, and was above the 9.0% consensus expectation from economists.

A day earlier, copper prices were also given a lift from a report that showed China’s copper imports in July rose 12% to more than 410,000 tons – the most since May 2012.

This Chinese theme is no coincidence: As the Wall Street Journal noted, copper traders closely follow the Asian nation’s economic data since China accounts for 40% of global copper demand.

Similarly, it has been investors’ broad concern about a slowdown in Chinese economy hurting copper demand that has contributed to the metal’s slide since a recent peak in early 2011. Copper is widely used in everyday goods like phones, cars and household plumbing, and is sensitive to shifts in the pace of economic expansion, the Journal said.

dr copper motifWith better data from China, copper prices have risen. So, too, have the shares of copper mining firms, which have not fared well this year amid copper’s drop. Our Dr. Copper motif, a portfolio of 10 copper mining stocks, has gained 6.5% in the past 30 days. During that same period, the S&P 500 is down 1.3%.

So far in 2013, the motif is down 19.3%; the S&P 500 has risen 14.8%.

As with most commodities, demand – and prices – will ebb and flow, and it’s worth noting that the price of copper is still about 30% below where it traded in early 2011.

In addition, a pessimistic take on China’s copper import surge by Tom Holland in the South China Morning Post asserted that the rise in demand may actually represent an attempt by Chinese authorities to curb credit expansion through its shadow financial system.2 With other financing channels closed off, Chinese companies are reverting to buying copper on margin, then using the metal as collateral to obtain low-cost loans.

That isn’t necessarily a vote of confidence for an indefinite rise in copper prices in the near term. But as Holland also noted, the long view on Chinese demand for the metal may be on more solid ground. As he pointed out, while China’s demand for copper is high, its consumption, on a per capita basis, is still comparatively low – in fact, it uses just half as much as the US.

In addition, the main source of China’s demand is its burgeoning electricity generation and distribution industry, which would boost demand for more copper in years to come, Holland said, as will the country’s intention to invest disproportionately in alternative energies, which are far more copper-intensive to produce.

For now, however, the next significant move for copper may only come after China’s next report on industrial output.

1Tatyana Shumsky, “Copper Prices End Higher, Lock In Best Week in 10 Months,” WSJ.com, Aug. 9, 2013.

2Tom Holland, “Despite setbacks, the long-term outlook for copper is bright,” scmp.com, Aug. 13, 2013, http://www.scmp.com/business/article/1296257/despite-setbacks-long-term-outlook-copper-bright.