Base Metals

Despite a lackluster start to 2015, copper prices started to creep back up following the end of Lunar New Year celebrations in China. Analysts have reiterated their positive outlook for the red metal.

Despite a lackluster start to 2015, copper prices started to creep back up following the end of Lunar New Year celebrations in China, and analysts have reiterated their positive outlook for the red metal.

First, Dundee Securities put out its sector outlook on base metals and bulk commodities this past Friday, presenting a number of considerations that could bump up the copper price in 2015. Mainly, the firm points to seasonality in copper inventories, noting that they tend to rise until April before falling for the rest of the year.

According to Dundee, total copper inventories stayed higher in 2013, but fell throughout the year to end down more than 20 percent last year. For 2015, inventories are up 50 percent from the start of the year, but have started to “go sideways.” The firm suggests in its report that inventories need to fall for copper prices to move higher, though “generally a pickup in Chinese buying after Chinese New Year or further unexpected supply constraints” could help. It also cites continued weak oil prices and a potential correction for the strong US dollar as factors that could influence copper for the better.

“[T]here is a good chance that the copper price bottom is behind us,” Dundee suggests, referring to when copper hit a low of US$2.42 per pound in January. The firm is still waiting to see what happens to inventories during March and April, and admits that weaker-than-expected Chinese demand could lead to “a rerun of 2013.” However, even if copper prices move lower in the near term, Dundee believes it’s “relatively clear” that copper prices should move upwards in the second half of 2015.

Macquarie: “copper to shine”

Dundee isn’t the only firm with a positive view on the red metal. Macquarie Research recently upgraded the base metals sector from “neutral” to “overweight,” stating that base metals are its “top sector pick within resources.”

“We believe that supply and demand fundamentals in the copper market, combined with recent price momentum in the space outweigh the headwind from potential further increases in the US dollar,” Macquarie notes in a report.

Specifically, the firm expects price gains through the end of 2015, with copper rising more than 10 percent, mostly in the second quarter.

Further outlining its reasons for overweighting copper and the base metals sector, Macquarie points to supply disruptions — such as a drop in output from BHP Billiton’s (NYSE:BHP,ASX:BHP,LSE:BLT) Olympic Dam — that are accelerating the move from surplus to deficit for the metal. The firm is also relatively optimistic on European demand growth; meanwhile, its China economist, Dr. Larry Hu, sees further stimulus on the horizon in China in the near term, which could also help copper.

Delving into the downside of things, Macquarie suggests that speculation played a big part in the downturn for copper in the latter half of 2014 and into 2015. To support that point, it notes out “net non-commercial futures positions have become the most net-short in over 20 years.”

Certainly, there are plenty of factors for investors to consider, and with the copper price sitting around $2.69 per pound, it may be difficult for some to get too optimistic just yet. However, last week’s predictions from Dundee and Macquarie definitely give weight to Lawrence Roulston’s advice not to get hung up on short-term copper prices.

Top stock picks

In their reports, both firms also provide a few of their top picks from the copper sector.

Lundin Mining (TSX:LUN) is Macquarie base metals analyst Daniel Greenspan’s top pick “for its significant commodity and geographic diversification, strong balance sheet and lower risk growth projects.” He also sees upside potential for Hudbay Minerals (TSX:HBM) and recommends First Quantum Minerals (TSX:FM) for “maximum leverage to the copper price.”

Lundin, Hudbay and First Quantum are also on Dundee’s list, though the firm also mentions Nevsun Resources (TSX:NSU) as one of its top picks in terms of copper producers.


Securities Disclosure: I, Teresa Matich, hold no investment interest in any companies mentioned in this article.


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