Why copper is a good buy now
Monday, 07 May 2012 | 00:00
In the past few years, the commodities market has come into the limelight due to the lack of financial opportunities in other markets. So, apart from gold and silver, various commodities are now being zeroed in by investors as a portfolio diversification tool to manage and contain risk. One of the more attractive options is copper, which is a very versatile metal.
Since copper is a good conductor of electricity, it is an essential component for energy-efficient generators, transformers, motors and renewable energy production systems. Over the past decade, the consumption of copper has increased at a phenomenal pace. The metal's prospects increased as China, the world's fastest growing economy, drove the demand for base metals. China's share in the total world consumption rose from 37% in 2007 to 51% in 2010, while that of the EU and the US stood at 26% and 13%, respectively in 2010, when the world's copper consumption was 19.16 million tonnes. Here's a break-up of copper's consumption pattern globally-30% in the building and construction space, around 20% in infrastructure and utilities, 10% in industrial equipment, 10% in the transport sector, and the rest contributing to the demand in other categories.
On the production front, there was a deficit of 382,000 million tonnes for the first 11 months of 2011. Concerns over supply remain and this factor, coupled with an improving economic scenario in the US, will support the copper prices after the second quarter of 2012. China is expected to loosen its monetary policy during the year and the return of credit in the market will also help boost demand. However, until then, any negative news on the Eurozone front will act as a deterrent to price rise in the next 3-4 months.
As for the domestic market, we are witnessing a steady growth in demand because of the rise in infrastructure development on a pan-India scale, as well as growth in the manufacturing sector. In 2011, the Indian demand for copper was 7.2 lakh tonnes. The major copper consuming segments are electrical products, with a 30% share; engineering, construction and transport, with a 26% share; and the telecom sector, with a share of 20%. There is scope for growth in copper consumption as the country's per capita consumption is significantly low at 0.5 kg compared with 4.6 kg of China, and much lower than the world average of 2.4 kg.
You can trade in copper through futures trading on the commodity exchanges and e-series on the National Spot Exchange of India. Within futures trading, you can choose from a normal contract size (1 million tonne) to a mini-contract (250 kg). The copper e-contract on the NSEL is even smaller at 1 kg.
In the past few years, copper prices have fared well (see LME graph). Since January this year, the red metal has risen more than 13% on the London Metal Exchange (LME). Currently, copper is trading at around $8,355/tonne on the LME, which is much below the all-time high of $10,190/tonne that it touched in February 2011. Since the prices are currently impacted by the macro-economic factors, the pressure on copper has led to a reversal in trend. However, its long-term prospects remain bullish as falling ore grades, along with rising labour issues in the mining sector, have raised concerns as far as supply is concerned.
Tips for first-time investors
Copper prices depend on a variety of factors, one of the most important being the economic growth and demand-supply scenario in China, the world's largest copper consumer. So, keep an eye on any change in the country's import figures as it will affect the price movement. Inventories of the metal monitored by global exchanges, such as the LME, will also help you gauge the current demand-supply patterns. Besides, you must keep track of the release of economic indicators by major global economies since these act as trendsetters for prices.
a. Copper prices are trading at about Rs 430 a kg and are expected to trade between Rs 410-455 a kg in the medium term.
b. Slowdown of economic growth in China and lingering Eurozone sovereign debt concerns will continue to dominate the market sentiments. So, consider the macroeconomic scenario before taking a trading decision.
Source: Economic Times