Copper prices are heading for the first monthly decline this year. On Monday, copper fell in New York to the lowest price in more than five weeks, as an increase in inventory sparked mounting concern that demand is dwindling.
Stockpiles in warehouses monitored by the London Metal Exchange rose 1.1 per cent to 344,350 metric tons, the highest since May 19. They have climbed 15 per cent in September.
Inventories keep rising, and it's taking a toll on copper, said Gijsbert Groenewegen, a partner at Gold Arrow Capital Management in New York. People are getting more and more worried about the demand situation. Copper is looking tired.
Last week, copper dropped 1.6 per cent as the dollar climbed 0.5 per cent against a basket of six major currencies. This year, a slumping dollar bolstered metal prices.
Dollar strength could now present a problem, Jon Bergtheil, an analyst at Citigroup Inc. in London, said in a report. Prices would need either rapidly improving fundamentals or ongoing weakness in the dollar for support, he said.
Although copper is not the largest base-metal market, it is still arguably the most important base metal of choice for investors and speculators. Moreover, with copper prices so heavily dependent on mainstream sentiment, it shouldn't be a surprise that copper was brutalized during last autumn's stock panic. That fear bubble led to the biggest and fastest copper plunge ever witnessed.
However, right after the panic's sentiment maelstrom passed, copper started recovering. The trend continues to this day, creating great opportunities in elite companies mining this critical metal.
Every long-term investor should own the world's best copper miners, as their stocks' appreciation potential in the coming years is huge. And every speculator ought to consider trading copper stocks, as they tend to mirror and nicely amplify moves in the broader stock markets.
Moreover, copper prices are more related to economic gains than apocalyptic concerns about the economy or world events.
So, what is the outlook? Over the next several years, countries like the US and China will have greater demand for copper, according to Prudential metals analyst Angus MacMillan. The US consumes one-fifth of global copper production, primarily in wiring and plumbing.
China's domestic growth, especially in manufacturing, is fueling its demand. MacMillan estimates world consumption of copper to rise 4 per cent, the first uptick in three years.
There are several companies in the fray. Like Phoenix-based Phelps Dodge (NYSE: PD), which struggled to a $342 million net loss in 2002 due in part to mine closures and other efforts that dropped its production costs by 6 cents per pound.
Another miner poised to benefit from copper's rebound is Toronto-based Noranda (NYSE:NRD). Noranda's shares have fallen 27 per cent over the past year to $8.50. Like Phelps Dodge, Noranda has been busy streamlining its operations, and should reap the benefits.
The world's largest copper mine high in the Andes mountains, Southern Peru Copper (NYSE: PCU), which produces more than 800 million pounds of copper a year is another stock that analysts love.
The slowdown has reflected in Southern Peru's current price, down 70 per cent during the past year [from a peak above $40], even though operating margins are 52 per cent and management is earning a whopping 46 per cent return on equity.
This stock is so cheap that it sells for just six times earnings, analysts maintain. Southern Peru also is yielding 10.9 per cent. With the company sitting on more than $1.2 billion in cash, it will have no trouble paying its dividend.
Chile's second biggest mining association, Sonami, expects the average price of copper to rise by up to 19 per cent next year, which might encourage the continuation of more copper projects in the South American nation, its president told Reuters.
The average copper price may rise to $2.50 per lb in 2010 from an average of $2.10 to $2.30 this year, Sonami's Alfredo Ovalle said in an interview at a forum in Santiago.
Hudbay stock soared last week on the find of copper and gold at its Lalor site in Manitoba. Initial tests found 13.35 grams per tonne of gold and 5.3 per cent copper.
The new find was beneath a previously announced zinc find near HudBay's Snow Lake concentrator in the Flin Flon Greenstone belt.
The copper and gold intersection ... is among the best I have seen in nearly 40 years in the mining business, HudBay president Peter Jones said.