Forget Oil: Copper, Coal the Best Recovery Commodities

Forget oil, if you’re seeking exposure to the global economic recovery; look to copper and coal, says Citigroup’s global head of commodity research, Alan Heap.

The fundamental outlook is strongest for copper, coking coal and thermal coal, he told clients. Mr. Heap is also still positive on gold, but remains negative on iron ore. As for potential surprises, he suggested nickel and aluminum could be the place to be.

“The meteoric rise in base metal prices has surprised us and the market,” Mr. Heap said. “The risk that prices collapse back to trough levels has now passed.”

He did add that some of the increase may be unsustainable in the second half of the year.

Citigroup raised its 2010 per pound forecasts for aluminum from US60¢ to US70¢, for copper from US$1.65 to US$2.50, for nickel from US$5 US$6, and for zinc from US47.5¢ to US70¢. It left its target for gold unchanged at US$925 per ounce. The firm’s coking and thermal coal estimates climb from US$120 per tonne to US$140 and US$70 to US$80, respectively.

With demand for commodities in developed economies like the United States, Japan and Europe bottoming, Mr. Heap suggested that the situation is turning and will be amplified by a powerful restocking cycle. But the extent of restocking remains a question mark. Excess inventory remains elsewhere in the pipeline and a lack of confidence by businesses could slow things down.

As was the case before the downturn, China is still the engine. Its imports have ballooned, proving to be the most important source of upward price momentum.

“Although underlying demand is improving, much of the increase in imports has gone into strategic and speculative inventory,” Mr. Heap said. “We believe inventory buying has already ended for many commodities.”

Investors are back in the commodities game too, with more money going into related indexes. In fact, investments proved extremely robust through the downturn and are now increasing once again, Mr. Heap said. “Shorts are being covered and new longs established.”

A switch to hard assets and an emphasis on the defensive attributes of commodities has come from an environment of systemic risk in financial markets. The reflation trade is also in play. Although deflation concerns are currently at the forefront, there is a growing view that inflation may be inevitable given the massive amounts of fiscal stimulus.

Mr. Heap thinks it is possible that sustained buying by speculators and investors will support commodity prices (particularly copper) through a period of short term fundamental weakness in the second half of 2009. In the second half of 2010, fund flows may anticipate the coming fundamental tightness in 2011, he added.

“When fundamental tightness really bites fund flows could drive prices to new highs.”

Mr. Heap also expects gold to benefit from ongoing investment.

Comments

[Windsun33:]

I think not just copper, but most industrial metals, except for Aluminum.

Jul 09 02:40 PM

[donzelion:]

I see many people jumping on the commodities bandwagon out of fear of a dollar collapse. Perhaps those fears are warranted, but fear alone is unlikely to propel these markets too far.

Given the uncertainties with hard commodities, it seems to me that soft commodities (and the companies that make the stuff that makes them) will be the safer play.

Jul 09 09:17 PM

[nmelendez:]

With China and India expanding, that's over 2.5 billion new customers. Everything is going up in the next 10 years. It's called capitalism!!!


On Jul 09 09:17 PM donzelion wrote:

> I see many people jumping on the commodities bandwagon out of fear
> of a dollar collapse. Perhaps those fears are warranted, but fear
> alone is unlikely to propel these markets too far.
>
> Given the uncertainties with hard commodities, it seems to me that
> soft commodities (and the companies that make the stuff that makes
> them) will be the safer play.

Jul 09 09:48 PM

[Mark Anthony:]

Mr. Alan Heap's comment that China's strategic inventory buying of commodity "already ended", is completely wrong. That is because he doesn't understand the real nature and purpose of China's recent raw materials buying spree around the world.

Put it simple, it goes way beyond merely stockpiling for a possible future shortage. The real purpose of China's commodities buying, is to quietly spend out its excessive US dollar reserve, without causing too much attention:

seekingalpha.com/artic...

Make no mistake: The Chinese knows the dollar is losing value and they are doing their best to divest their dollars, as quietly as possible, as fast as possible. The strategy is so far very success and it will continue for now.

Jul 10 12:35 AM

[jerrydd:]

Sorry but thermal coal is not the future, it's the past.

Coal is too costly, it's just it's cost is in our income taxes, health care, shortening of buildings, bridges lives, water, land and air pollution etc from mining to burning. We need and soon will have all these costs in coal through a tax so it's real, full cost is in it.

Already coal use in the US is dropping as old coal plants die and replaced by NG, wind and eff, conservation. Last yr there was more wind than any other electric source.

NG is used first in a gas turbine which exhaust feeds an old coal or new steam plant getting 55-60% eff is the new fossil fuel model as coal handling, transport, pollution scrubbing, etc costs are just too much.

So anyone betting on coal are bound to be more poor in the future except coal for iron making like Walter Industries.

The smart long money is on quality companies owning wind farms, other RE as the price of electricity rises and their costs are low, fixed.

Copper is the most likely to rise as RE, now becoming the real low cost energy source is based on it plus it's many other uses.

Oil will be great after it drops to the low $50's until about 5 yrs when it's too high costs makes people conserve, buy more eff cars and switch to alt fuels and EV's, the lowest cost option in 5 yrs both to buy and run. With many more buying RE for their home to cut high electric bills they can even charge their own EV saving even more.

Money talks and we know what walks and RE with it's moderate initial cost and dropping and low running cost, same as EV's will be the future.

I as many drive EV's and done right are !/2-1/4 the cost to run if built as EV's. My EV's get 250mpg equivalent EV 80 mpg, 100 mile range sportwagon and 600mpge for my 3 wheel EV MC. Sadly until next yr you still have to build your own but that will change very fast once car makers start and gas hits $4/gal again late next yr..

Jul 16 09:54 AM