Some fund managers are increasing exposure to copper mining companies, betting the industry has reached the bottom of a downturn and that shares offer value for money.
Copperhas lost almost a third of its value from a peak in 2011 due to a slowdown in top metals consumer China, which buys about 40 percent of global output.
Copper miners' shares represented by the Thomson Reuters GFMS pure-play copper companies index fell by almost 40 percent over the same period.
Historically the shares move more sharply than the metal price and they currently look fairly priced compared with the metal, data from metals consultancy Thomson Reuters GFMS shows.
This offers an attractive entry opportunity for investors with a 2-5 year view because copper's fundamentals are expected to improve in the medium term.
Data from Morningstar shows that some of the largest natural resources funds, including JPM Natural Resources and BGF World mining, have already increased their exposure to copper companies in the last few months.
"Any investor with a longer-term horizon, ready to bear some volatility, should see the next 12 months as an opportunity to pick up copper companies, since starting from 2016 the market should be tightening up," George Cheveley, natural resources portfolio manager at Investec, said.
Cheveley suggested diversified miners with good copper exposure such as BHP Billitonand Glencore for a defensive play or First Quantum , Southern Copper or Grupo Mexico for a higher-risk exposure to copper.
Canadian miner First Quantum is investing in projects in Zambia and Panama hoping to almost treble its copper production by 2018, to become one of the world's largest producers.
Pioneer Investments said it has been increasing exposure to copper versus diversified miners in the last few months, buying shares in Swedish copper and zinc miner and smelter Bolidenwhich unlike most copper miners is only present in low-risk OECD countries. This stock is now a significant holding in some of the company's key European funds, Pioneer said.
"Investing in diversified players clearly gives some diversification of risk but usually a lot of exposure to iron ore which faces some challenges. We tend to prefer clean (copper companies) plays," a spokesman for the company said.
Iron ore prices are expected to decline in the next few years as major suppliers flood the market with extra output which analysts think will more than meet demand.
SUPPLY DEFICIT
Unlike the early 2000s boom, driven by demand from China and other emerging markets, the next copper price upswing will be triggered by tighter supply, with the copper market predicted to tilt into deficit from 2016, according to Ernst & Young.
Shareholders have forced big mining groups to cut or delay investment in new projects and return more cash instead after years of unruly expansion resulted in hefty writedowns. Rio Tinto, for example, is planning to cut spending to $8 billion in 2015 from about $14 billion last year.
There have also been fewer major copper discoveries which are economical to mine as well as rising production costs and falling ore grades.
“The lack of investment interest in new mining projects is sowing the seeds of the next supply shortage, and hence the next boom, that will take place merely because there is not enough supply," Ernst & Young global mining and metals leader, Mike Elliott said. "We think in late 2016 the copper shortage will start to bite and prices are going to have to rise to attract new mine development but that’s not so easy. You can’t just turn on the tap."
GFMS calculated the capital cost to bring on stream one tonne of new copper production has risen by 13 percent in the last year and reckons the incentive price to attract new investment is roughly $7,478 per tonne. The current copper price falls short of that at about $7,140.
Source: Reuters
Copper
Copper miners' shares represented by the Thomson Reuters GFMS pure-play copper companies index fell by almost 40 percent over the same period.
Historically the shares move more sharply than the metal price and they currently look fairly priced compared with the metal, data from metals consultancy Thomson Reuters GFMS shows.
This offers an attractive entry opportunity for investors with a 2-5 year view because copper's fundamentals are expected to improve in the medium term.
Data from Morningstar shows that some of the largest natural resources funds, including JPM Natural Resources and BGF World mining, have already increased their exposure to copper companies in the last few months.
"Any investor with a longer-term horizon, ready to bear some volatility, should see the next 12 months as an opportunity to pick up copper companies, since starting from 2016 the market should be tightening up," George Cheveley, natural resources portfolio manager at Investec, said.
Cheveley suggested diversified miners with good copper exposure such as BHP Billiton
Canadian miner First Quantum is investing in projects in Zambia and Panama hoping to almost treble its copper production by 2018, to become one of the world's largest producers.
Pioneer Investments said it has been increasing exposure to copper versus diversified miners in the last few months, buying shares in Swedish copper and zinc miner and smelter Boliden
"Investing in diversified players clearly gives some diversification of risk but usually a lot of exposure to iron ore which faces some challenges. We tend to prefer clean (copper companies) plays," a spokesman for the company said.
Iron ore prices are expected to decline in the next few years as major suppliers flood the market with extra output which analysts think will more than meet demand.
SUPPLY DEFICIT
Unlike the early 2000s boom, driven by demand from China and other emerging markets, the next copper price upswing will be triggered by tighter supply, with the copper market predicted to tilt into deficit from 2016, according to Ernst & Young.
Shareholders have forced big mining groups to cut or delay investment in new projects and return more cash instead after years of unruly expansion resulted in hefty writedowns. Rio Tinto
There have also been fewer major copper discoveries which are economical to mine as well as rising production costs and falling ore grades.
“The lack of investment interest in new mining projects is sowing the seeds of the next supply shortage, and hence the next boom, that will take place merely because there is not enough supply," Ernst & Young global mining and metals leader, Mike Elliott said. "We think in late 2016 the copper shortage will start to bite and prices are going to have to rise to attract new mine development but that’s not so easy. You can’t just turn on the tap."
GFMS calculated the capital cost to bring on stream one tonne of new copper production has risen by 13 percent in the last year and reckons the incentive price to attract new investment is roughly $7,478 per tonne. The current copper price falls short of that at about $7,140.
