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Copper Rallies on Improving Demand & Supply Shortage Concerns

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LME Copper prices gained 1% to $5,895 per ton on Jun 23 as positive data from Europe and the United States fueled hopes of an economic recovery. This, in turn, spurred demand for the red metal. Further, the U.S President’s tweet that the “China trade is fully intact” added to the momentum. In fact, copper prices have been gaining lately on the back of optimism over financial stimulus, lower inventories and strong demand in China — the top customer. In a month’s time, the metal has gained 10%.

A Roller Coaster Ride So Far

Copper had its fair share of ups and down this year. Though it commenced 2020 on a strong note at $6,165 per ton and soon attained a high of $6,300 per ton on Jan 16, this rally was short-lived. The widely-used industrial metal lost steam on account of the coronavirus outbreak in China. With the country implementing containment measures and shutting down its production lines to curb the virus spread, the demand for the metal was impacted severely. As the outbreak rapidly took the shape of a pandemic, the consequent slump in economic activity and plunging oil prices led to copper prices plummeting to a low of $4,617.50 on Mar 23, 2020 — a 27% decline from the January high. However, copper prices crossed the $5,000 per ton threshold in April and are currently trending close to $5,900 per ton.

Factors Driving Copper

Eurozone Manufacturing PMI came in at 46.9 in June, ahead of the expectation of 44.5 and previous month’s 39.4. This was the weakest contraction in factory activity in four months, as coronavirus lockdown restrictions have been relaxed. Meanwhile in the United States, sales of new U.S. single-family homes jumped 16.6% sequentially to a seasonally adjusted annual rate of 676,000 units in May.

Business activity contracted moderately this month. According to IHS Markit, flash U.S. Composite Output Index, which surveys both the manufacturing and services sectors, was at 46.8 in June, up from 37 in May. The U.S. Services Business Activity Index was at 46.7 compared with 37.5 in May. Contraction in factory activity is showing signs of slowing down, with the flash U.S manufacturing PMI at 49.6, up from 39.8 in May. Even though a reading below 50 indicates contraction, all these indexes are at a four-month high. These figures suggest that the U.S economy is recovering from the damage inflicted by COVID-19 crisis.

Further, the potential supply disruption from top producer Chile due to the worsening coronavirus situation in the country is supporting the red metal’s prices. Chile’s current coronavirus case tally stands at 250,767 with the death toll at 4,505. The country currently has one of the world’s highest infection rates per capita. Cases at mines are escalating and authorities have tightened restrictions. This puts country’s copper supply under threat. Meanwhile, demand in China remains strong as it is gradually moving out of the crisis and is working toward full normalization of economic activities. Further, China’s stimulus program focused on new infrastructure and urbanization will require massive amounts of copper.

The long-term outlook for copper remains 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 10.4% over the past month compared with the S&P 500’s growth of 5.4%. The industry falls under the broader Basic Material sector, which increased 5.3%.

The industry currently carries a Zacks Industry Rank #83, which places it at the top 33% 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 FreeportMcMoRan Inc. (FCX - 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 company’s Zacks Consensus Estimate for the current year is pegged at a loss of 6 cents per share, which has improved from a loss per share of 38 cents in the past 60 days. The company has a trailing four-quarter positive earnings surprise of 36.8%, on average.

Investors interested in the industry may consider keeping an eye on Zacks Ranked #3 (Hold) stocks like Coeur Mining, Inc. (CDE - Free Report) , Energy Fuels Inc. (UUUU - Free Report) and Peninsula Energy Limited (PENMF - Free Report) , which have positive earnings growth estimates of 145%, 59%, and 29% for 2020, respectively.

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