Copper stocks could be set to rally this year as analysts sound the alarm on the metal’s inventory levels.
Copper mines around the world have been ramping up production in the past couple of years as copper prices rebounded from their 2009 lows. The ramp-up led to a surplus in global inventory last year, which resulted in analysts expecting another surplus this year.
Data released in the past week, however, suggest copper inventories might be much tighter than expected.
“With copper concentrate exports from Indonesia still in limbo, Chinese copper demand apparently quite healthy, and reports that China’s State Reserve Bureau purchased 200,000 tonnes of copper in recent months, the much discussed 300,000-tonne 2014 surplus may have just disappeared,” said Greg Barnes, analyst at TD Securities.
Data released by the London Metal Exchange show copper inventories have dropped below 200,000 tonnes, the lowest level since October 2008. Mr. Barnes notes that on-warrant copper inventory, which is metal that is actually available to the market, is down to only about 100,000 tonnes, the lowest amount since May 2008.
The reason the copper market hasn’t moved much on the news — copper prices have remained consistent at around US$3.10 a pound since the start of May — is because Chinese warehouses continue to hold a large amount of the metal. With worries that China’s economy is set to cool in the coming years, some of that copper is expected to find its way back to the London Metal Exchange in the form of arbitrage.
Mr. Barnes points out, however, that even China’s copper supply is now shrinking. Warehouse stocks peaked at just over 800,000 tonnes in March and recent estimates peg those stocks at around 700,000 tonnes.
Tom Meyer, analyst at CIBC World Markets, said copper’s tightness could create rapid price spikes this year.
“Like natural gas advancing from its April 2012 lows, and the surprisingly sharp and unexpected move higher in nickel and molybdenum this year, we wonder what could be in store for copper,” he said. “The risk of production disappointments is high, in our view, and thus with a limited buffer, the price moves can be swift.”
Mr. Meyer said that means the risk-reward tradeoff for investors in copper companies is becoming increasingly favourable. He identified First Quantum Minerals Ltd. and Capstone Mining Corp. as two particularly attractive choices in the copper space.
He called both companies “project rich,” noting First Quantum in particular has half of its net asset value under construction, meaning it is well positioned to grow cash flow if copper prices take off.
First Quantum is one of Mr. Barnes’ top picks alongside Lundin Mining Corp., though he noted the latter relies heavily on expansion, which “may face cost overruns and development risks.”