Copper is closely watched by investors, as it’s considered to be a leading indicator of economic growth. The commodity is an input for all sorts of infrastructure, electrical systems, automobiles, machines, and power grids.
Strong Copper Demand in 2021
In 2019, the global economy used 24.3 million tons of copper. Due to the coronavirus, copper demand was lower in 2020, but there are many reasons to expect that demand will be exceptionally strong in 2021 – a rebound in global manufacturing and trade; a robust US housing market; and a strong Chinese economy.
The first major reason is that the global economy is turning a corner. The most variable component of global growth is manufacturing. Since 2018, global growth has decelerated primarily due to the trade war with China which exacerbated a cyclical downturn in manufacturing. Of course, it eventually fell even further with the coronavirus and shutdown causing all sectors to deteriorate.
Global trade and growth should improve significantly in 2021. Countries all over the world are deploying fiscal stimulus which should boost aggregate demand and spending. Trade tensions will likely relax due to the Biden Administration’s less antagonistic approach.
ISM data shows that inventories are at low levels, (due to the softness in trade) while New Orders are elevated, which correlates to an inventory restocking cycle.
The US housing market is in very good shape. Supply is low, while affordability is relatively higher due to rock-bottom mortgage rates.
Additionally, due to a decade-long bull market, household balance sheets are in good shape and relatively underleveraged which increases confidence that the strong housing market isn’t going to dissipate anytime soon.
High housing prices have many positive effects on the economy such as increased consumer confidence and wage growth for blue-collar workers. Another is more homebuilding and more renovations which results in increased use of copper.
Most countries, including the US, remain in sort of a stalemate situation with the coronavirus. Increased economic activity increases the virus’ spread which causes its own damage and may eventually end with less activity due to people staying home or forced lockdowns. This puts a limit on economic growth, until a vaccine is widely distributed.
However, China seems to have transcended this situation. They were the first to be hit by the virus and instituted the most severe measures in terms of medical care, quarantine, shutdowns, and contact tracing. It seems to have worked as life is mostly back to normal. Economic data like consumer spending, gasoline demand, and industrial activity are back at 2019 levels.
China is the number one source of demand for copper, accounting for half of the global demand due to its manufacturing sector. In September, copper imports rose to their second-highest level of all-time.
3 Stocks to Consider
These are three powerful, supportive trends for copper prices. Another contributor to demand growth is increased investments in “green energy” projects in the coming years as copper is integral to renewable energy projects. According to McKinsey, copper demand will increase by nearly 45% in the next 15 years.
Some of these positive developments are already being reflected in the price action as copper prices hit seven-year highs this week:
However, there’s plenty of upside given that the ingredients are in place for a multiyear, bull market. For investors who believe that copper prices will remain strong in 2021, these are the three best stocks to consider: Freeport McMoran (FCX), Southern Copper (SCCO), and Teck Resources (TECK).
Freeport McMoran (FCX)
FCX has operations on three continents. It’s one of the largest producers of copper but also produces gold and molybdenum. However, it’s considered a copper stock since it accounts for 75% of revenue.
In 2019, FCX mined 3.25 billion pounds of copper. Every $0.10 increase in the price of copper translates into an additional…
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