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Copper Stages a Comeback Riding on Strong Demand in China

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Copper has been on the rise of late driven by economic stimulus from central banks and economic recovery in China — the metal’s top consumer. LME copper prices gained 2% to $5,801 per ton on Jun 10, 2020 — levels last seen in February. The metal has climbed 12% over the past month.

Copper commenced 2020 on a strong note at $6,165 per ton and attained a high of $6,300 per ton on Jan 16. However, this rally was short-lived as the widely-used industrial metal soon lost steam on account of the coronavirus outbreak in China. The country, which is a top importer of copper, implemented containment measures and shut down its production lines to curb the virus spread, consequently demand took a hit. As the outbreak rapidly took the shape of a pandemic, it impaired industrial activity globally. This along with plunging oil prices, led to copper prices plummeting to a low of $4,617.50 on Mar 23, 2020, marking a decline of 27% from the January high. However, copper prices have recovered since then and crossed the $5,000 per ton threshold in April.

What is Aiding Copper’s Recovery?

The U.S manufacturing sector has been hit hard by the pandemic. The Institute for Supply Management’s Manufacturing Purchasing Managers’ Index (PMI) came in at 43.1% in May, an improvement from April’s 41.5% as businesses are resuming operations in most states. Although the reading remains below 50 (which denotes contraction), the sequential improvement provides a ray of hope. Considering the fact that the manufacturing sector accounts for 11% of the U.S. economy, a pick up in the sector raises optimism regarding the overall economic recovery.

Meanwhile in China, the Official NBS Manufacturing PMI was 50.6 in May 2020 — the third straight month of increase in factory activity as companies are resuming operations. This indicates a major recovery from the all-time low PMI reading of 35.7 in February amid the coronavirus-induced lockdown. This indicates that China is gradually moving out of the crisis and is working toward full normalization of economic activities. These developments are looking in favor of copper.

Further, Chile accounts for over one third of world's copper production followed by China and Peru. Due to the pandemic, miners had to suspend production in these countries. This will impact supply of the industrial metal this year while demand in China remains strong. China’s stimulus program focused on new infrastructure and urbanization will require massive amounts of copper. Central banks have cut interest rates in recent months, providing unprecedented stimulus to mitigate the impact of the pandemic on the global economy. This will continue to drive copper prices.

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 probably push copper prices north.

Industry Performance & Rank

Copper miners fall under the Zacks Mining - Non Ferrous industry, which has gained 20.6% over the past month compared with the S&P 500’s growth of 11.5%. The industry falls under the broader Basic Material sector, which increased 17.3%.

The industry currently carries a Zacks Industry Rank #72, which places it at the top 29% 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 Coeur Mining, Inc. (CDE - Free Report) , which currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Estimate for current year’s earnings has gone up 43% over the past 60 days, indicating year-over-year growth of 140%.

Investors interested in the industry may consider keeping an eye on stocks like Paramount Gold Nevada Corp. (PZG - Free Report) , Peninsula Energy Limited (PENMF - Free Report) and Energy Fuels Inc. (UUUU - Free Report) . All companies carry a Zacks Rank #3 (Hold) at present and have positive earnings estimates for 2020.

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