One of the biggest challenges forcommodity investors is the
state of the globaleconomy ,
as I stated in this article.
Weak economic growth in 2012 has kept a lid on the sector, so most
commodities have fallen in price from a year ago. Copper, which is
used in a range of economically-sensitive industries such as
construction, is especially vulnerable to the vagaries of the
The China factor
As has been the case since the GreatRecession of 2008, the only
brightspot for commodities has been China, and even that country
showed signs of slowing in 2012. The good news: China is
perkingback up and could again set a positive tone for commodities
-- especially copper -- in 2013. Analysts at Goldman Sachs have
tallied up the various stimulus packages the provincial governments
in China have proposed, and they came up with a stunning $3.2
trillion in ongoinginvestment . Much of that investment is going
toward housing and transit systems. Their key takeaway: "We believe
that a sustainable recovery in China's infrastructure and property
sectorwill be most beneficial for copper; this is a metal where
China requires significant imports and where we think supply-side
challenges will continue to keep themarket in a relatively tight
That's also a view shared by analysts at Merrill Lynch, who
predict copper could rally to $4 a pound in 2013. "China has shown
increasing signs of green shoots in a wide range of sectors (i.e.,
transportation, export, property market)... (which) suggests that
demand for the cyclical mined commodities could improve." That
forecast move to $4 a pound may prove to be conservative,
considering copper prices stood above $4.50 a pound in the summer
of 2011, the last time the global economy looked poised for
But if you compare theprofit outlook for copper producers to
copper price forecasts, then you'll find a curious disconnect:
"North American copperequities are pricing a median copper price of
$2.15 [a pound], because the market does not believe copper prices
above $3 [a pound] are sustainable. However, we believe supply
constraints through 2020 support a more constructive view," said
The key takeaway is that copper prices don't need to rally to $4
a pound as these analysts anticipate. Instead, prices merely need
to hold their ground so these stocks can finally getappreciation
, the world's largest copper producer, would have been a clear
beneficiary of a firm copper market. But the company's
recently-announced plan to buy
Plains Exploration (NYSE:
McMoran Exploration (NYSE:
, a pair of oil and gas plays, has changed that thesis. Freeport
McMoRan has subsequently shed several billion dollars ofmarket
value as investors soured on a now weakerbalance sheet and a more
muddled business mix. More than likely, these deals willbear fruit
andshares are likely to rebound as the company starts to deliver on
promisedcash flow targets. Still, this is no longer the
"no-brainer" copper pure play it once was.
Instead, you may want to check out
Southern Copper (NYSE:
. The Arizona-based firm owns a network of low-cost mines in Peru,
Mexico and Chile. The company's mines are so productive, thanks to
easily accessible copper concentrations, that it costs this company
less than 35 cents a pound to mine, or roughly 10% of the global
spot-market selling price.
This is one of the few companies in position to expand output,
with plans to hike copper production from 640,000 tons of copper
this year to 1 million tons by 2016. Many of the company's rivals
are having a hard time finding productive new mining opportunities,
which helps explain why long-term supply may stay constrained.
Finding the companies that won't have supply constraints, like
Southern Copper, ensures you can profit from firm copper prices and
rising copper output.
If you'd rather steer clear of the copper miners and prefer
exposure to the commodity itself, then exchange-tradedfunds (
) are the better route. Unfortunately, most of them are very thinly
traded. The mostliquid of the group: The
iPath DJ-UBS Copper Total Return Sub-Index (NYSE:
, which has more than $100 million in assets under management and
trades more than 50,000 shares a day. This ETF owns copperfutures
contracts and would post solid gains if copper moved toward $4 a
pound in 2013, as Merrill Lynch's analysts suggest.
If you are willing to tolerate thin trading volumes, then the
VelocityShares 2X Long Copper ETN
is even more highly leveraged to copper prices. Thisfund has shed
roughly 20% since early November, creating a fresh entry point.
Risks to Consider:
As noted earlier, China drives commodity prices, and any major
slowdown in that economy would force copper prices lower.
Action to Take -->
Commodities have been out of favor for much of 2012, thanks to
global macro-economic concerns. Yet as the United States, China,
Brazil and other economies expand in 2013, and as funds flow out
ofbonds , commodities could be a major beneficiary. Copper is an
especially economically-sensitive commodity, thanks to its outsized
role in construction. Considering the recent positive data points
emanating from the U.S. housing sector, coupled with fresh stimulus
efforts in China, it may be time for copper to shine in 2013.
-- David Sterman
P.S. -- If you've been looking to add resource stocks to
your portfolio, now may be the time. The global trend for
commodities is rising demand coupled with shrinking supplies.
That's why we've seen soaring prices for years... and it means
short-term sell-offs can be rare buying opportunities. To learn
more about Scarcity & Real Wealth, which focuses solely on
the market's best resource investments, visit this link (without
watching any promotional video).
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of FCX, MMR in one or more of its "real money"
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