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Copper Prices Close at $6,000 an Ounce on Supply Concerns

Madhurima Das

Over the month of June, copper prices have gained 11% and currently trending close to the level of $6,000 an ounce. This uptrend can be attributed to optimism over financial stimulus and strong demand in China, which is the top consumer, amid growing fears of disruption in copper output in Chile. LME Copper prices closed at $5,957 per ton on Jun 29. Copper, whose demand is linked to global economic growth and activity, fell prey to the impact of the COVID-19 in the first quarter and suffered a decline of 22%. However, the red metal has made a dramatic comeback in the second quarter with a gain of 25%.

Strong Turnaround

Copper commenced 2020 at $6,165 per ton and attained a high of $6,300 per ton on Jan 16. However, this rally was cut short as the coronavirus outbreak in China resulted in the country implementing containment measures and shutting down production lines. This severely impacted demand for copper. Meanwhile as the outbreak rapidly took the shape of a pandemic, the consequent slump in global economic activity and plunging oil prices led copper prices plummeting to a low of $4,617.50 on Mar 23, 2020 — a 27% decline from the January high. Copper has however regained lost ground since then and crossed the $5,000 per ton threshold in April. It is currently trending close to $6,000 per ton.

Factors Favoring the Recovery

Supply Issues in Chile:  Concerns of a potential supply disruption from top producer Chile due to the worsening coronavirus situation in the country is supporting the red metal’s prices. Chile’s current coronavirus case tally stands at 275,999 with the death toll at 5,575. The country currently has one of the world’s highest infection rates per capita. Cases at mines are escalating and authorities have tightened restrictions.

Chile’s state-owned copper miner Codelco has halted operations at its biggest smelter and refinery in Chuquicamata division to prevent further spread of the virus. Chile's mines minister Baldo Prokurica recently projected a decline of 200,000 tons in the country's copper output. This represents 3.5% of the country’s 2019 production.

Signs of Recovery in Economic Activity: Demand in China remains strong as it is gradually moving out of the crisis and is working toward full normalization of economic activities. The country’s stimulus program focused on new infrastructure and urbanization will require massive amounts of copper.

Also, Eurozone Manufacturing PMI came in at 46.9 in June, ahead of the expectation of 44.5 and previous month’s 39.4. This was the weakest contraction in factory activity in four months, as coronavirus lockdown restrictions have been relaxed.

Meanwhile in the United States, sales of new U.S. single-family homes jumped 16.6% sequentially to a seasonally adjusted annual rate of 676,000 units in May. Per the Federal Reserve, industrial production increased 1.4% in May following a decline of 12.5% in April, as factories resumed operations. After contractions in March and April, manufacturing output —rose 3.8% in May.

According to IHS Markit, flash U.S. Composite Output Index, which surveys both the manufacturing and services sectors, was at 46.8 in June, up from 37 in May. The U.S. Services Business Activity Index was at 46.7 compared with 37.5 in May. The flash U.S manufacturing PMI came in at 49.6, up from 39.8 in May. Even though a reading below 50 indicates contraction, all these indexes are at a four-month high. These figures suggest that the U.S economy is recovering from the damage inflicted by COVID-19 crisis. This bodes well for copper.

Industry Performance & Rank

Copper miners fall under the Zacks Mining - Non Ferrous industry, which has gained 37.5% over the past three months compared with the S&P 500’s growth of 16%. The industry falls under the broader Basic Material sector, which increased 31.4%.

The industry currently carries a Zacks Industry Rank #59, which places it at the top 23% of more than 250 Zacks industries. The group's Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bright prospects in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Investors interested in the industry can consider FreeportMcMoRan Inc. FCX, which currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for FreeportMcMoRan for the current year indicates year-over-year growth of 50%. The company has a trailing four-quarter positive earnings surprise of 36.8%, on average. The stock has gained 64% in the past three months.

Investors interested in the industry may consider keeping an eye on Zacks Ranked #3 (Hold) stocks like Coeur Mining, Inc. CDE , Energy Fuels Inc. UUUU and Paramount Gold Nevada Corp. PZG, which have positive earnings growth estimates of 145%, 59%, and 21% for 2020, respectively. Shares of Paramount Gold Nevada have appreciated 105% over the past three months, while Coeur Mining and Energy Fuels shares have gained 49% and 24%, respectively.

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