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Copper at 4-1/2-Month High on Solid Imports Data From China

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Copper prices hit a four and a half month high on strong data of imports from China, its biggest customer. The progress in trade talks with China also worked in favor for the metal. Copper prices closed at $2.75 per pound on Dec 11, recording an improvement 4.8% so far this year. Last year, the industrial metal had suffered a decline of 20.2%.

Factors that Drove the Surge

Solid Data From China: Overall imports to China rose 0.3% year over year to $183.01 billion in November 2019, following a decline of 6.2% in October. Meanwhile, the market consensus anticipated a fall of 1.8%. It also marked the first year-over-year import growth since April. This improvement was primarily due to a 6% year-over-year growth in imports of unwrought copper to 483,000 tons in November — the highest since September 2018.

Further, China's factory activity improved unexpectedly in November. The Purchasing Managers’ Index (PMI) was at 50.2 in November, returning to growth after six months of continued contraction. Total new orders bounced back with the sub-index at 51.3 — the highest level seen since April. Demand rose on Beijing’s stimulus measures to steady growth. Given that China consumes half the world’s copper, this led to a rise in copper prices.

Upbeat Employment Numbers From the United States: Copper prices also got a boost from strong payroll numbers. Per the Bureau of Labor Statistics, 266,000 non-farm payrolls were created in November — the highest since January. This followed growth of 156,000 in October and surpassed the consensus of 180,000. Notably, the unemployment rate is at a historical low of 3.5%. This data quelled the concerns regarding a recession in the U.S. economy.

Prospects of Phase One Trade deal:  The United States and China working toward a phase one trade deal bodes well for metal demand, particularly copper, which is usually viewed as a gauge of economic health. The widely utilized industrial metal has been losing ground due to the trade conflict between Washington and Beijing.

Poised Well for the Long Haul

The long-term outlook for copper is positive as demand is anticipated to improve on the back of electric vehicles and renewable energy and infrastructure investments. Further, expectations of rising middle class in Asia, particularly China and India, will stimulate demand for copper. Primary output from currently operating mines is likely to decline over the coming decade. To meet rising demand, new mines will have to be developed. Notably, the new mines are scarce and capital intensive. Along with this, declining copper grades, increased input costs and water constraints will drive copper prices in the future.

Consequently, copper miners like Southern Copper SCCO, Freeport-McMoRan Inc. (FCX - Free Report) , BHP Group BHP and Rio Tinto plc RIO are focusing on increasing their copper exposure to cash in on prospects.

Copper miners fall under the Zacks Mining - Non Ferrous industry, which has outperformed the Zacks S&P 500 composite and its own sector so far this year. The stocks in this industry have collectively rallied 20.4% compared with the S&P 500 and the Basic Materials Sector’s growth of 17.5% and 0.9%, respectively.

The industry currently carries a Zacks Industry Rank #56, which places it at the top 22% of more than 250 Zacks industries. The group's Zacks Industry Rank, which is basically 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 should consider Arconic Inc. ARNC and Paramount Gold Nevada Corp. PZG. Both the stocks currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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