Copper has had a rough year, down about 20% in the last 52 weeks. Much of the weakness was from the belief that demand was non-existent and that supply would be greater than demand. However, the sources of demand have not diminished, though have pulled back a bit from their peaks. While there has been some reduced demand during the Great Recession, the economy is improving. Thus, demand is likely to increase relative to the last three years. Recall that copper also has many uses industrially. The red metal plays a vital role in many facets of our lives. People have been using copper since at least 9000 BC. One reason copper is so important is that it can be made into alloys, which are combinations with other metals to make new materials like brass and bronze. These alloys are harder, stronger and more corrosion resistant than pure copper.
Copper has many unique properties, which make it a prime choice of industrial applications, such as:
- Being an excellent electrical and thermal conductor, second only to the more expensive silver.
- Being resistant to corrosion and oxidation (rust).
- Being non-magnetic.
- Being recyclable.
- Being ductile and easy to combine with other metals.
- Possessing anti-bacterial properties allowing for use in medical devices.
- Ability to be easily joined by soldering or brazing.
Given such properties and being less expensive than silver, copper is frequently used in electronics, locks, water pipes and in electrical wiring. It is reasonable to expect that an economic recovery that leads to more construction in the commercial and residential sectors should increase the demand for copper, as well as the price of the metal.
One place to first look is housing, which has finally come off its bottom and may be entering a long-term bull market. A strong indication of this reality is that the homebuilding stocks have been among the market leaders in 2013, as the SPDR S&P 500 Homebuilders ETF (XHB) is up another 22% year-to-date. While homebuilding stocks are a good buy on a confirmed housing rebound, owning copper could be a rewarding pin action play to consider. If housing as well as commercial/industrial construction is indeed picking up again, it should serve as another catalyst for the price of copper because residential and commercial construction use approximately 40% of the copper in the United States, with direct residential construction constituting approximately two-thirds of the market. There were approximately 200 pounds of copper electrical wire in the average new home constructed in 2012. Office building copper use can trump this significantly depending on the size of the structure. Further, these figures do not include the amount of copper wiring that goes into additional home appliances, plumbing and air-conditioning systems, accounting for more of the demand for copper.
China is a major source of demand for copper. A United States Geological Survey reported a total reserve base, in 2005, of 1.6 billion tons of recoverable ore, of which 950 million tons was considered economically recoverable. Given current world demand of 15 million tons, much of it coming right from China, recoverable copper may be exhausted in slightly more than 60 years. Global copper consumption is expected to grow by 1% to 2% annually, on average. Refined copper demand reached 20.4 million tons in 2011 compared with global production of 16.1 million tons for the same time period. China's demand is the largest and fastest growing of all markets, accounting for over 22% of global demand. China's demand, which has been growing at 15.1% a year since 2000, was expected to slow to 6.6% growth in 2013, which has indeed been a recent hit to prices. Although China's growth rate has slowed, it is still over 7%, meaning demand will continue into the future. This reduced demand may be offset by demand from a rebound in the US economy and a bottoming Europe. Once these economies get moving, demand will skyrocket. Long-term investors may want to consider getting in ahead of this demand curve. The recent sell-off in prices, which saw copper dip from $3.81 per pound to as low as $3.09 per pound, offers a nice buying opportunity. In May prices have come up about 5% to trade around $3.23 a pound.
There Are Multiple Ways to Invest in Copper:
Copper ETN: iPath Dow Jones-UBS Copper Total Return ETN (JJC): The JJC is an ETN that gives investors exposure to copper futures without the complexity of directly buying futures contracts. Without delving too far into the differences, take note that an ETN is different than an ETF. An ETF contains actual securities or commodities whereas an ETN gives exposure to contracts. More information about the differences between an ETF and ETN can be found here. JJC gives investors a cash payment at maturity based on the performance of the Dow Jones-UBS Copper Total Return Sub-Index. With $111.21 million in assets, JJC is trading around $41.72 and has an expense ratio of 0.75. JJC has a 52-week trading range of $41.38 to $49.33 on average daily volume of 65,000 shares exchanging hands daily.
Mining stocks: A good way to gain exposure to precious metals as a whole but to copper specifically is through the miners. I have previously recommended gold miners as the best alternative to playing the SPDR Gold Trust ETF (GLD). Further, I believe that copper miners represent more diversified investments than solely copper as they often have cross exposure to other metals. Further, these miners generally pay a nice dividend. If you believe in a rebound in housing and commercial construction and thus believe that copper prices will rise, then it's hard not to like my three favorite plays in the mining space, Freeport-McMoRan Copper & Gold (FCX), BHP Billiton (BHP) and Southern Copper (SCCO), right now.
FCX is a bellwether in the copper sector. It engages in the exploration, mining and production of mineral resources. The company primarily explores for copper, gold, molybdenum, cobalt hydroxide, silver and other metals, such as rhenium and magnetite. It holds interests in various mines located in the Grasberg minerals district in Indonesia, the Morenci minerals district in North America, South America and Tenke Fungurume minerals district in the Democratic Republic of Congo. As of December 31, 2012, the company's consolidated recoverable proven and probable reserves included 119.7 billion pounds of copper, 33.9 million ounces of gold, 3.42 billion pounds of molybdenum, 330.3 million ounces of silver, and 0.86 billion pounds of cobalt.
The company recently purchased two energy companies for $9 billion. "The oil and gas assets being acquired possess the asset quality characteristics that we seek in our mining business - large scale assets with long lives, low cost and geologic potential to support growth through exploration and development," said Richard C. Adkerson, CEO of FCX regarding the acquisitions. This acquisition has been questioned by many on Wall Street, but only time will tell if this investment will pan out for the company. Despite this, the company's mining assets are still of value considering the amount of gold, silver and copper it produces. Shares of the stock currently trade at $32.68 with a 10.6 P/E multiple. It has a 52-week trading range of $27.24-$43.65 and on average 17.8 million shares exchange hands daily. FCX pays a great dividend of 3.9% annually.
BHP engages in the exploration, development and production of oil and gas, mining and refining of bauxite into alumina, and smelting of alumina into aluminum metal, and mining of copper, silver, lead, zinc, molybdenum, uranium, gold, diamonds, and titanium minerals, as well as development of potash deposits. It also involves in the mining and production of nickel products, manganese ore, and manganese metal and alloys, as well as in the mining of iron ore, metallurgical coal, and thermal coal.
BHP sells its copper, lead, and zinc concentrates, and alumina to smelters; copper cathodes to wire rod mills, brass mills, and casting plants; uranium oxide to electricity generating utilities; rough diamonds to diamond buyers and diamond manufacturers; nickel products to stainless steel, specialty alloy, foundry, chemicals, and refractory material industries; metallurgical coal to steel producers; and energy coal to power stations, power generators, and industrial users. The stock currently trades at $67.66 with a 18.8 P/E multiple. It has a 52-week trading range of $59.87-$80.54 and on average 2.7 million shares exchange hands daily. BHP pays a hefty dividend of 3.3% annually at current levels.
SCCO is also a major copper miner. It engages in mining, exploring, producing, smelting, and refining copper and other minerals in Peru, Mexico and Chile. It is involved in the mining, milling and flotation of copper ore to produce copper and molybdenum concentrates; smelting of copper concentrates to produce anode copper; and refining of anode copper to produce copper cathodes, as well as refined silver. The company operates the Toquepala and Cuajone mines in the Andes Mountains located to the southeast of the city of Lima, Peru, as well as a smelter and refinery in the coastal city of Ilo, Peru. It also operates La Caridad and Buenavista copper mines, and smelting and refining plants in Mexico.
In addition to its major sites, the company operates five underground mines that produce zinc, copper, lead, silver and gold; a coalmine, which produces coal and coke; and a zinc refinery. It has 145,064 hectares of mineral rights in Peru; 176,250 hectares of exploration concessions in Mexico; 1,068 hectares of exploration concessions in Argentina; 35,958 hectares exploration concessions in Chile; and 2,544 hectares of exploration concessions in Ecuador. The stock currently trades at $33.06 with a 15.5 P/E multiple. The stock is trading in the middle of its 52-week trading range of $27.72-$42.03. On average 2.1 million shares exchange hands daily. SCCO currently pays a dividend of 2.4% annually
Global X Copper Miners ETF (COPX): For those who do not want to invest in a single copper miner COPX offers exposure to the entire sector. This is an ETF that tracks the Solactive Global Copper Miners Index, and its holdings include global firms from across the international spectrum. This international fund has roughly $31 million in assets, currently is trading at $10.40 and has an expense ratio of 0.65. The fund has a 52-week trading range of $9.71 to $14.50. Although the COPX offers exposure to the copper mining sector as a whole, the ETF is thinly traded, with only about 46,000 shares exchanging hands daily. Based on its most recent dividend, this ETF is yielding 3.7%.
Bottom line: Copper is a high demand industrial metal, and the demand for it should increase as the US economy rebounds. With the resurgence of economic growth in the United States and continued demand in China (which accounts for 22% of global demand), copper stands to gain. I think the bottom was set at $3.09. There is also strong evidence that housing has bottomed with homebuilder confidence near a six-year high. With a rebounding economy, both commercial and industrial construction should pick up. To gain exposure to copper, one can buy shares in an ETN such as JJC, an ETF such as COPX, or purchase the mining stocks. In my opinion BHP, SCCO and FCX represent the three best plays in the copper mining space.