Three-month copper futures on the London Metal Exchange (LME) gained 2.3% to $6,830 a metric ton on Sep 1 — the highest level since June 2018. LME Copper prices closed at $6,768 per metric ton on Sep 1, 2020. Surge in demand in top consumer China, improving manufacturing data and concerns over an impending supply crunch owing to the impact of the pandemic have been key factors behind the red metal’s rally lately.
Strong Turnaround
In the earlier part of the year, copper prices had taken a hit as the coronavirus outbreak in China resulted in the country implementing containment measures and shutting down production lines. This severely impacted demand for this widely used metal. 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. However, copper has regained lost ground, and is currently up 47% compared with the March lows.
Reviving Manufacturing Sector to Fuel Demand
China’s manufacturing sector is a key source of copper demand. The Official NBS Manufacturing PMI in China came in at 51.0 in August 2020, maintaining the streak of six consecutive months of increase in factory activity. This highlights a major recovery from the all-time low PMI reading of 35.7 in February, which was owing to the coronavirus-induced lockdown. These figures indicate China is gradually moving out of the crisis and working toward full normalization of economic activities. China’s stimulus program focused on new infrastructure and urbanization will require massive amounts of copper.
Meanwhile in the United States, per the Institute for Supply Management, the Manufacturing Purchasing Managers’ Index (PMI), came in at 56% in August – the highest so far in 2020. This also marks expansion in the sector for three months in a row. The manufacturing sector had been hit hard by the pandemic and energy market volatility, and other challenges associated with the pandemic, which included factory closures, supply chain disruptions and low demand for goods. Consequently, the PMI had plunged to 41.5% for April — the lowest since April 2009 when it registered 39.9%, putting a brake on 131 consecutive months of growth. Considering the fact that the manufacturing sector accounts for 11% of the U.S. economy, the recent pick up in the sector raises optimism regarding the overall economic recovery.
The IHS Markit Eurozone Manufacturing PMI came in at 51.7 in August 2020 after recording 51.8 in July. Growth in manufacturing output was witnessed for the second successive month during August and accelerated to reach its highest level for over two years.
Supply at Stake
The supply of the metal is likely to be lower this year. Due to the pandemic, miners in Chile, China and Peru had to suspend production. As per last available data, Chile’s copper production in July was down 1%. The Peruvian government announced that production of the red metal plunged 20.4% year over year in the first half of 2020 and dipped 2% in July. Rising number of infections among mine workers might result in a reduced workforce, limit productivity or even lead to closure of mines.
The long-term outlook for copper is positive as demand is anticipated to improve on investments in electric vehicles and renewable energy, and infrastructure. However, grade decline, rising input costs, water constraints and scarcity of high-quality future development opportunities continue to constrain the industry’s supply. The demand supply imbalance will fuel copper prices.
Industry Performance & Rank
Copper miners fall under the Zacks Mining – Non Ferrous industry, which has gained 12.5% so far this year compared with the S&P 500’s growth of 3.8%. The industry falls under the broader Basic Material sector, which increased 2.8%.
The industry currently carries a Zacks Industry Rank #68, which places it at the top 27% 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 Southern Copper Corporation SCCO and Coeur Mining, Inc. CDE. While Southern Copper sports a Zacks Rank #1 (Strong Buy), Coeur Mining carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Southern Copper’s current year’s earnings has gone up 10% over the past 30 days. The company has an estimated long-term earnings growth rate of 14.4%.
The Zacks Consensus Estimate for Coeur Mining’s current year’s earnings suggests year-over-year growth of 140%. The company has a trailing four-quarter earnings surprise of 86.1%, on average.
Investors interested in the industry may keep a tab on stocks like Paramount Gold Nevada Corp. PZG and FreeportMcMoRan Inc. FCX. Both the companies have a Zacks Rank #3 (Hold) at present and a positive earnings growth estimates for 2020.
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