Industrial metals, such as copper (HGJ24), have outperformed stocks this year, as signs of a revival in demand from Chinese manufacturers add to concerns over tighter global supply.

The much-ballyhooed forecast surplus of copper going into 2024 has suddenly disappeared. The next couple of years were supposed to be a time of plenty for copper, thanks to a series of big new projects starting up around the world. The expectation was for a comfortable surplus before the market would tighten again later this decade.

But that forecast has turned out to be dead wrong.

Copper and other industrial metals have risen sharply this month as investors grow more confident that an extended period of high interest rates is not choking off economic growth. At the same time, concerns are rising that production problems from mining companies will constrain supplies.

Looking at the copper price, it has risen nearly 10% since the start of 2024, and is up more than 15% in the past two months alone. It hit a 15-month high of $9,523 per metric ton on April 9. Copper’s gain has outpaced the Nasdaq-100 Index ($IUXX), which has gained 8.4% year-to-date.

Let’s take a look at how a growing supply shock and rising confidence in an economic recovery are now seeing copper take center stage in markets.

Why Copper Is Rising

Production concerns have been fueled by Panama’s order late in 2023 to shut a giant First Quantum Minerals Ltd. (FQVLF) mine, removing roughly 400,000 tons of copper from the world’s annual supply.

Then, mining giant Anglo American PLC (NGLOY)stunned investors by saying it was scaling back its copper output by about 200,000 tons.

Next, Chilean state mining giant Codelco - the No. 1 copper producer - produced the least amount of copper in 25 years, and output is still falling this year.

Finally, in March, Chinese copper smelters - which process more than half of the world’s supplies of copper - agreed to embark on rare joint production cuts in order to cope with the shortage of raw materials.

The market initially shrugged off these cuts, as consumption looked anemic because of the “Waiting for Godot” recession that has yet to arrive. But that’s changing as manufacturing — perhaps the most important demand source for copper — shows signs of picking up almost everywhere around the globe.

In China, the official manufacturing purchasing managers’ index expanded in March for the first time since September. And preliminary data from India points to some of the strongest growth for its industry in years.

And in the U.S. and Europe, it looks like we are past the worst in the construction sector.

Meanwhile, those supply shortages are likely to rear their head soon, as the smelters start to implement their production cuts.

How to Profit

“Elevated mine supply disruptions point to a deficit of 700,000 tons, and should start to feed through to refined production too,” said Morgan Stanley in a note. The investment bank predicts a $10,200 per ton copper price by the third quarter.

On April 8, Bank of America raised its price forecasts for industrial metals in anticipation of tightening supply and an acceleration in demand, particularly for copper.

BofA forecast the price for copper will rise to an average of $12,000 per ton by 2026. “The much-discussed lack of mine projects is becoming an increasing issue for copper,” said Michael Widmer, BofA commodity strategist, while “investment in green technologies and a rebound of the global economy” should lift prices further.

Recall that copper is used in power cables, wind turbines, electric vehicles (EVs) and solar panels, making it a key material for the energy transition.

Then there is artificial intelligence (AI). Copper demand linked to AI and data centers could add up to 1 million metric tons more of demand by 2030, and exacerbate supply deficits towards the end of the decade, according to commodity trader Trafigura.

The current situation in the copper market means pure-play copper producers have lured investors. Chilean copper producer Antofagasta PLC (ANFGF)has gained almost 30% this year, while Freeport-McMoran(FCX) is up nearly 21%.

Since there are so many copper producers that will be making a lot of money, I like taking a broad approach with a copper ETF.

My top choice is the Global X Copper Miners ETF(COPX), which has a portfolio of 37 mining stocks - including the two stocks above.

COPX is up 23.5% year-to-date, and is a buy at its current price around $46.35.