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The copper price may be trading at record highs, but with supply still lagging demand, it looks set to continue to do well in 2006 - and that's good news for these four stocks...
The copper price looks likely to continue to do well in 2006, notwithstanding the fact that it is trading near record highs (above $2/lb) amid the shenanigans of yet another far eastern rogue trading scandal, says Harry Wallop in The Daily Telegraph. This is for the simple reason that supply just isn’t meeting demand.
It’s mainly a production problem, says Maria Silander in the FT; the International Copper Study Group says there was a “sharp fall” in mining output in 2005, owing primarily to “production disruptions” in both the US and Chile, something now expected to continue into 2006. Another factor is smelter capacity, says Wallop. Firms cut back on building smelters when the copper price was low, but have been caught short since demand from China started booming. Now inventories are hovering near historic lows, yet smelting capacity hasn’t risen much and demand from China (both for its manufacturing industry and domestic wiring) shows little sign of slowing. No wonder the price is on the up.
Apart from investing directly in copper (tricky for retail investors), one of the best ways to gain exposure to the red metal is through shares in base metal producers, which, despite three years of out¬performance, both ABN Amro and UBS describe as fundamentally undervalued. On a multiple of under 12 times this year’s earnings, DKW rates BHP Billiton (BLT, 987p) a “must-have” stock, while Numis has recently upgraded its target price on Rio Tinto (RIO, £27.00) by 8% to £30.19.
Among the second liners, Vedanta (VED, 915p) – described by Citigroup as “a sweet spot for commodity exposure”, despite its more cautious stand on the copper market generally – stands out with a target price of £11.00 from Morgan Stanley, while The Independent’s Stephen Foley suggests that “long-term, risk-hungry investors with cash to spare” should consider FTSE novice Kazakhmys (KAZ, 784p).
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