Copper is taking some beating of late on heightened trade tensions between the United States and China, a strong dollar and concerns over the health of the Chinese economy. Prices of the red metal – which is used across a gamut of industries – are on a downward spiral having already lost more than 20% this year.
“Dr. Copper” Losing Steam
Copper – an important barometer for the global economy – is a major industrial metal and plays a significant role especially in emerging countries. Trends in the copper market are often considered as a useful indicator of the state of the global economy given the metals diverse applications. Developments in the world economy have a strong correlation with movements in copper prices.
Nicknamed Dr. Copper for being a reliable barometer to track the health of the world economy, the widely used industrial metal is losing ground on increasing worries owing to an escalating trade conflict between Washington and Beijing. Moreover, recent tepid economic data from China – the world’s biggest consumer of copper – has raised concerns of potential weaker demand for the commodity. The trade tensions have also raised a red flag about a possible slowdown in the global economy.
The Trump administration has threatened to slap a 25% tariff on $200 billion worth of Chinese imports. The public comment period on the U.S. proposal is set to a close on Sep 6. Once the deadline is over, the United States could impose tariffs on roughly half of the Chinese goods entering the country – making it the most impactful round of tariffs so far. The U.S. list of goods targeted for tariffs include several copper-intensive products.
Moreover, the heightened concerns owing to an escalating trade conflict between the world’s two largest economies are resulting in investors dumping emerging market currencies and seeking safe haven in dollar. The greenback also got an extra boost from upbeat U.S. economic data that showed manufacturing growing at its fastest pace in 14 years. A stronger dollar makes dollar-priced metals costlier for holders of other currencies.
Copper prices fell 5.2% on the London Metal Exchange (LME) in August, according to Reuters. This was the largest monthly decline in two years and the third straight monthly drop. After flying to a four-year high in June, prices of the metal touched a low of $2.55 per pound on the New York Mercantile Exchange last month and the commodity officially entered bear market territory.
China Weighing on Copper Demand
A possible slowdown in China's economy is a concern. China's manufacturing activity slowed to a 14-month low in August, affected by sluggish domestic demand and contraction in export orders. China’s Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) for August came in at 50.6, down from 50.8 in July. While the reading was above 50 (indicating growth), it was slowest since June 2017. China’s Caixin/Markit services PMI also slipped to 51.5 in August from 52.8 in July. The August reading marks the lowest level in 10 months.
China holds the largest share by far of global copper consumption, and has a significant share in the total production of pure copper. Trends in Chinese GDP growth and world trade have a significant influence on copper prices. There is a strong correlation of the metal with ups and downs in the Chinese economy. As such, a possible cooling in China's economy may hurt the nation’s demand for the red metal. Moreover, the intensifying trade tussle between China and the United States is expected to weigh on copper demand in China.
The Threat of Supply Glut
Oversupply in the market poses a threat to copper prices. The International Copper Study Group (“ICSG”) expects a 3% growth in worldwide mine production in 2018 following a 1.5% decline last year. The projected growth is partly due to the recovery from constrained output in 2017, especially across Chile and Indonesia. Global refined copper production is also forecast to go up around 4% in 2018.
Meanwhile, output from Codelco – the world’s top copper producer – rose 2% to 813,000 tons in the first half of 2018. The Chilean state copper company expects to produce roughly 1.7 million tons of copper this year.
Who Gains from the Slump?
In the short haul, copper prices are likely to remain under pressure due to trade tensions and worries over Chinese demand. The copper market has also been stuck in the quagmire of oversupply.
While falling prices of copper is a bad omen for mining stocks including Freeport-McMoRan Inc. FCX and Southern Copper Corporation SCCO, it is expected to have a positive impact on a vast spectrum of industries, in which, the metal has a widespread use.
Electrical (wire and cable), building construction (pipes and wires), and consumer goods are among the industries that require a significant amount of copper as raw material for their operations, and thus, are expected to gain from the descending copper prices. Companies across these industries will see margin benefits through reduced raw material costs.
3 Stocks to Benefit
Below we list three stocks which will gain from the copper meltdown as they purchase significant volumes of the metal as input for their operations.
Atkore International Group Inc. ATKR
Illinois-based Atkore manufactures and distributes electrical raceway products. It offers steel tubes and pipes, electrical conduit, armored wire and cable, cable trays, metal framing systems and building components. Copper is among its primary raw materials.
Atkore sports a Zacks Rank #1 (Strong Buy) and has an expected earnings growth of 92.3% for fiscal 2018. You can see the complete list of today’s Zacks #1 Rank stocks here.
The company delivered positive earnings surprise in three of the trailing four quarters, with an average positive surprise of 24.5%. The stock has also gained roughly 24% over the past three months.
Belden Inc. BDC
Missouri-based Belden engages in the design, manufacture and retail of cable, connectivity, and networking products in markets including industrial automation, enterprise, transportation, infrastructure, and consumer electronics. Copper is the major raw material the company uses for its cable products. It is a key component of the cost of most of Belden’s cable products.
Belden sports a Zacks Rank #2 (Buy) and has expected earnings growth of 19.4% for 2018. It delivered positive earnings surprise in three of the trailing four quarters, with an average positive surprise of 2.1%. The stock has also rallied roughly 23% over the past three months.
Lennox International, Inc. LII
Based in Texas, Lennox is a global leader in the heating, air conditioning and refrigeration markets. The company designs, manufactures and markets a broad range of products for the heating, ventilation, air conditioning and refrigeration markets. Copper accounts for a significant portion of its raw material purchases.
Lennox has a Zacks Rank #3 (Hold) and an expected earnings growth of around 22.9% for 2018. The company has topped the Zacks Consensus Estimate in each of the trailing four quarters, with an average positive surprise of 3.3%. The stock has also returned around 8% over the past three months.
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