Copper Is Still King

By Aaron Levitt | April 06, 2011 AAA

Gold and silver seem to be getting most of the attention in the metals complex from investors these days. As worries about inflation and massive budget deficits are creeping back into investors' minds, people have been flocking to the precious minerals sector, sending respective prices advancing. Funds like the ETFS Physical PM Basket Shares (Nasdaq:GLTR) have surged in recent months on these concerns. However, as the world's economies continue to improve their infrastructure and crave more modern conveniences, the industrial metal complex may provide better long-term returns. With one industrial metal being king of them all: copper.

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Rising Demand
Used in a variety of infrastructure, electrical and power generation products, copper could be the best way to play the industrial metal complex and the strengthening global economy. The red hot metal is facing both bullish long and short term catalysts that make it good investment despite the generalized commodity run-up. On the supply side, Global stockpiles of copper are expected to fall to an all time low this year on top of the nearly 22% decline in inventories in 2010. Analysts predict that the global refined-copper market may experience a deficit of 500,000 tons to 600,000 tons in 2011. Various bank analysts and executives from copper producer Freeport-McMoRan (NYSE:FCX) have stated that low ore grades and scarce new resources will dwindle supplies. Australia's Macquarie Bank estimates that 2011's shortage may be the largest since 2004.

On the demand side, continued emerging market growth is one of the main bullish catalysts for copper investment. Analysts at Barclay's estimate that China currently accounts for 40% of global copper demand. However, its per capita use is still ten years behind the average developed Asian economy. As China matures, its copper consumption will need to rise to 20 million tons. The current annual total worldwide production of copper is only about 16 million tons. India's copper demand is set to grow by 7-11% through 2011, as it expands its energy transmission architecture. In addition, many analysts see potential new future demand for copper by hospitals due to its antibacterial qualities. This new source of demand is estimated to be in the hundreds of thousands of tons.

All of this bullishness for the industrial metal has many analysts upping their price targets for copper for 2011. Macquarie estimates that copper throughout the year will average $11,025 a metric ton, a 32% increase on its previous estimate. Morgan Stanley also increased its price targets for the metal through 2015. Analysts there predict prices will average $4.45 a pound in 2011. Copper prices are currently trading in the $9585 to $9590 a ton range.

Playing Coppers Red Hot Streak
With copper prices continuing to surge, investors with a longer term profile may want to consider the red hot metal for their portfolio. There are plenty of ways to access the metal from a variety of angles. The iPath DJ-UBS Copper ETN (NYSE:JJC) is still the easiest way to bet directly on copper prices. However, there are other ways to get exposure.

As China maintains its building binge and continues to improve its infrastructure, investors may want to take a look at Lihua International (Nasdaq:LIWA). The company produces a variety of copper wire/cables and will be direct beneficiary of the construction. Similarly, investors can bet on Encore Wire (Nasdaq:WIRE).

Income Plays
While dividends and commodities, generally do not go hand and hand, Southern Copper (Nasdaq:SCCO) offers 5.5% dividend yield. Besting payments from rivals like Sterlite Industries (NYSE:SLT). The company has mining, smelting, and refining mineral operations in politically stable Peru, Mexico, and Chile.

Finally, for investors who can't decide on a single copper pick, both the Global X Copper Miners ETF (Nasdaq:COPX) and First Trust ISE Global Copper Index (NYSE:CU) allow investors to bet on a basket of global miners such as Taseko Mines (NYSE:TGB).

Bottom Line
While gold and silver get all the attention, the long-term base metals rally chugs on with copper as the star of the show. Despite the run up in copper prices throughout 2010, the metal will undergo a major supply-demand deficit going forward. With improvements in global infrastructure increasing at a rapid pace, investors should consider adding some copper exposure to their portfolios. (For related reading, take a look at The Copper King: An Empire Built On Manipulation.)

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