Copper: Buying Opportunity In Miners

December 13, 2010

Copper's recent price antics have propelled it center stage, but what lies ahead for the red metal—and its miners—in the coming months?

 

Copper is up 24 percent for the year, currently hovering around $9,000 per metric ton after briefly hitting a record $9,091/tonne last week. Meanwhile, LME inventory levels have dropped 30 percent this year:

 

Copper vs. Inventory

 

The International Copper Study Group's (ISCG) latest statistics reveal that the reason comes back to supply and demand: For the first eight months of the year, mine production had only increased 1 percent year-over-year, while usage was up 8.3 percent.

Even so, the ISCG forecasts stockpiles will end 2010 slightly in the black, with approximately 200,000 metric tons of the red metal left in surplus.

Looking ahead, however, the picture is much different.

For 2011, most market analysts expect supply to be tight, with analysts surveyed by Bloomberg predicting a median shortage of approximately 367,500 tons. The International Copper Study Group takes a more bullish view on the balance, forecasting a larger shortage of 435,000 tons.

With prices so high, and the potential for a looming supply shortage, one would expect production to ramp up considerably to meet demand, but such production increases take time. Mine utilization levels were at 79.5 percent for the first eight months of the year, according to the ICSG—lower even than in credit-starved 2009. Reopening mines closed in 2008 is a long process, and project lead times for new exploration and new mines are even longer.

That's why copper's outlook remains positive even at today's record high prices. Morgan Stanley released a statement that said:

 

"Although prices are currently trading close to their all-time high, strong demand trends, low inventory and ongoing supply constraints have reinforced our conviction that copper fundamentals remain the strongest in the base-metal complex."

 

ICSG expects the supply/demand forces to balance out by 2012, so 2011 might be the right time to profit in copper.

 

How To Play Copper Miners

Last week, the news was all about ETFS Physical Copper (PHCU) launching on the London Stock Exchange, but as of yet, physically backed copper ETFs have yet to launch in the States.

But there's always futures, of course, and a number of stocks and ETFs offer copper exposure too—some of which you may already have in your portfolio.

Find your next ETF

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