Copper Remains A Value

By Aaron Levitt | January 05, 2012 AAA

As fears about a slowing global growth have taken hold, a variety of "risk" assets have seen their prices fall. Nowhere is that more prevalent than in the commodities space. Prices for various natural resources, aside from oil and gold, have all seen large slides downwards over the last few months. Broad measures of the sector, like the iShares S&P GSCI Commodity-Indexed Trust (ARCA:GSG), now sit closer to their 52-week lows than their highs. For forward thinking investors, this recent plunge in commodities prices have opened up some interesting opportunities. One industrial metal superstar currently offers a compelling value, which could see its price rise over the next year.

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Paging Dr. Copper
With analysts worrying about a slowing global economic growth, copper prices have plummeted. Finding its way into a variety of industrial applications, like electrical wiring and circuit boards, the red metal is often used as gauge for economic growth. With that growth slowing, copper prices have recently fallen around 21%. This follows a 30% increase in copper prices during 2010 and a 140% surge in 2009. China, which accounts for more than 40% of the world's copper consumption, saw its purchasing managers index (PMI) and manufacturing numbers slip during the second half of the year. Data provided by HSBC (NYSE:HBC) showed that China's PMI was 48.7 in December. Anything below 50 signals contraction in the sector. This coupled with the eurozone's debt woes have taken the wind out of coppers sails in the short term.


However, this could be just a near term blip. Several analysts now think that Dr. Copper could see higher prices in the New Year. In the United States, recent improving economic conditions and a recovering housing market are helping to bolster copper prices. The average U.S. home uses around 400lbs of copper, and the nation is the second largest consumer of the metal. Increasing factory activity in the U.S. is also a major driver, and analysts estimate that the economy will expand at 2.1% during the year. In addition, China has begun replenishing its inventories. The Asian dragon imported more than 452,000 tons of copper in November. This was the highest monthly total in nearly two years. Analysts predict that Chinese copper imports will grow 6% during 2012. (While gold looks very attractive today, over a period of years, copper is likely to produce a more attractive result. For more, see Is Copper The New Gold.)

Perhaps, the strongest reason to be bullish on copper prices is that of dwindling supplies. Australian bank Macquarie (OTCBB:MQBKY) thinks copper prices will rebound in 2012 due to the fact that copper mines are struggling to supply the marketplace with adequate reserves. Constraints such as escalating production costs and recent labor problems will cause major supply shocks going forward.

Make an Appointment to See the Doctor
For investors, the recent slide in copper prices has opened up a longer termed opportunity to enter the sector. The First Trust ISE Global Copper (Nasdaq:CU) tracks 27 different firms with copper mining operations such as Taseko Mines (AMEX:TGB). The exchange-traded fund (ETF) has fallen right along with copper prices and now can be had for a P/E of just 7. Similarly, investors can use the Global X Copper Miners ETF (ARCA:COPX). (ETFs are a viable alternative to mutual funds, but before you invest, there are a few things you should know. For more, see Using ETFs To Build A Cost-Effective Portfolio.)


Suffering the double whammy of falling gold and copper prices, Freeport-McMoRan Copper & Gold (NYSE:FCX) makes an interesting value proposition in the sector. A three-month strike at its Grasberg mine in Indonesia (the world's second-largest copper mine) sent Freeport's shares sliding. Now, the firm can be had for about half of its recent 52-week high and a 2.7% dividend. Likewise, Southern Copper (NYSE:SCCO) now yields a huge 9.3%.

The Bottom Line
The recent global slowdown has had its way with copper prices. However, conditions are right for the metal going into 2012. For investors, the commodity represents an interesting value play. The previous stocks and ETFs, along with the iPath DJ-UBS Copper ETN (ARCA:JJC), make ideal selections to play higher copper prices.


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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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