How to Profit from the Copper Turnaround in 2013

One of the biggest challenges for commodity investors is the state of the global economy, 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
As has been the case since the Great Recession of 2008, the only bright spot for commodities has been China, and even that country showed signs of slowing in 2012. The good news: China is perking back upand 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 ongoing investment. 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 sector will 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 the market in a relatively tight position.”

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 the profit outlook for copper producers to copper price forecasts, then you’ll find a curious disconnect: “North American copper equities 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 get appreciation.