Copper may not have the cachet of gold, but the lowly, industrial metal could shine just as brightly in the months ahead.
The price of copper hit a record high of $4.60 (U.S.) a pound in February before the Japanese earthquake and weak economic data snapped the rally. But some commodity experts expect the metal, which closed Thursday at $4.10 a pound, to climb higher by year end as shortages intensify.
In contrast, gold has been retreating recently from its peak of over $1,900 an ounce last month. While rising production costs have narrowed profits for gold miners, copper firms can still “make a profit margin that is over 70 per cent” at current commodity prices, said Patricia Mohr, a commodity markets specialist at Bank of Nova Scotia.
“Copper is the new gold,” Ms. Mohr says. “Even at $1,900 an ounce for gold , the profit margin on copper [at current prices]is higher. … That is why Barrick Gold bought [copper producer]Equinox Minerals.”
The bullish case for copper stems from expectations that global demand for the reddish metal, which is used for everything from electrical wiring and plumbing to kitchen utensils, will exceed production again this year.
Despite worries about a slowing global economy and the recent stock market correction, the metal has remained above $4 a pound. Supply disruptions caused by a labour disputes at several mining sites have helped buoy its price.
Copper prices should rally in the fourth quarter because of the growing appetite for the metal by China and other emerging markets, Ms. Mohr said. China has been buying copper recently to restock inventory after whittling away at stockpiles earlier this year when prices were higher.
Concerns about weak global growth have knocked down the stock values of copper miners, but they can still make lots of money at current commodity prices, she said. Barring a U.S. recession, copper stocks “should rally in the fourth quarter,” she said. “They are quite oversold.”
Bart Melek, head of commodity strategy at TD Securities Inc., is “moderately optimistic” about rising copper prices by year end. “We are expecting a copper deficit of about 400,000 tonnes this year compared with about 241,000 last year,” he said.
He estimates copper to average $4.30 a pound in the fourth quarter, and next year, but trend lower in 2013 when new mines comes on stream. The price of the metal could surpass its previous peak over the next year provided there is no double-dip recession in the United States, he said. “We do see decent growth out of China of between 8.5 to 9 per cent over the next four quarters.”
Haywood Securities metals analyst Kerry Smith expects copper prices to fluctuate in the range of $3.80 to $4.25 a pound for the rest of the year. He prefers copper to other base metals because it has better fundamentals, and describes valuations of copper stocks as “reasonable” at five times cash flow.
He has an “outperform” rating on copper stocks like Anvil Mining Ltd. (one year target, $8.60); First Quantum Minerals Ltd. ($28); Teck Resources Ltd. ($60) and Lundin Mining Corp. ($8).
Investors can also play the copper market through exchange-traded funds tracking the metal’s price or futures contracts. ETFS Physical Copper ETF, an exchange-traded fund listed on the London Stock Exchange, holds the actual metal, while Horizons COMEX Copper ETF, on the Toronto exchange, tracks futures contracts. (J.P. Morgan Chase and BlackRock have been trying to get regulatory approval for their physical metal ETFs in the United States.)
“The big risk to the copper market is if China’s demand drops through the floor,” Mr. Smith said. “I don’t see that happening. So far, they have done a pretty good job managing their economy, and they are buying copper as a hedge against the next 30 years of building construction that they have to do.”
Global X Copper Miners ETF
The ETF tracks a basket of stocks of copper miners, refiners and exploration companies. The fund is about 44 per cent invested in Canadian companies such as Inmet Mining, First Quantum Minerals and Ivanhoe Mines. It charges a 0.65-per-cent fee.
First Trust ISE Global Copper ETF
The ETF tracks companies with a market value of at least $75-million that are involved in copper mining, refining and exploration. It is 39 per cent invested in Canadian companies, including Ivanhoe Mines, First Quantum Minerals and Lundin Mining. It charges a 0.7-per-cent fee.
Horizons COMEX Copper ETF
This fund, which charges an 0.84-per-cent fee, tracks the daily performance of copper future contracts. Sophisticated investors might also consider leveraged versions, including Horizons COMEX Copper Bull+ ETF , which offers twice the daily performance of these contracts, and Horizons COMEX Bear+ ETF , which provides twice the downside performance.
Editor's Note: An earlier online version of this story incorrectly referred to Haywood Securities as Hayward Securities. The error has been corrected.