So much for China (FXI, quote) leading a plunge in copper (JJC, quote) prices as inventories tied to collateral for loans were being dumped. Industrial growth globally is near multi-year highs across Europe US and much of Asia.

CopperEven without China providing sensational demand, they are still 40% of the world’s copper demand and have continued to buy.   The excitement for market players has increased as China has delivered solid if not impressive data in the last month, including the first expansionary PMI in six months.

We have often discussed the “stealth stimulus” going on China via the currency, specialty lending and the RRR cuts. We would argue there is more to come.   In addition to China there are other forces weighing on copper demand: Auto sales globally are at record highs and housing recovery is more than a concept in the US and much of Europe – it’s happening. As a result spec longs in copper have increased over the last two weeks according to data by the CFTC.

Copper may be the best relative value trade in the industrial metals space. Nickel prices spiked last year and have held multi-year highs. Aluminum has rebounded along with auto sales and industry wide supply discipline finally settling in. People tend to lump copper producers in with coal and ore producers because of the China demand factor.

This is wrong for reasons that are the underlying market is broader but also because there is not a structural over-supply of copper as there is ore and coal. Also after years of challenging conditions and over capacity built at the peak, ore and coal producers largely have balance sheets that under major duress if not facing bankruptcy, while copper players look very different.  

Alcoa (AA, quote), Norilsk Nickel (NILSY, quote), and other core players outside of copper have charts that are near multi-year highs or at them. Valuations are pricing in EPS expansion as spot prices have trended higher. Copper producers have not been afforded that luxury and their share prices reflect investors’ concerns on macro growth.

A basket of names that exposes investors to global copper demand growth with some diversification into energy, zinc, and other metals includes: Freeport Mac (FCX, quote), Teck Resources (TCK, quote), Southern Copper (SCCO, quote). Globally a copper basket should include: Kazakmys and Antofogasto on the HKG exchange.

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