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How to Profit from the Copper Turnaround in 2013
12/19/2012 9:30:00 AM
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 global economy.
The China factor
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 synchronized growth.
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 Merrill's analysts.
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 .
Instead, you may want to check out Southern Copper ( SCCO ) . 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 are willing to tolerate thin trading volumes, then the VelocityShares 2X Long Copper ETN (exchange-tradednote ) (Nasdaq: LCPR) 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.