Strong Outlook for a Soft Metal

The day-to-day action in any market occasionally rattles the nerves of even the most seasoned investors. If recent losses in commodity stocks have you tapping your computer screen in hopes that it will reset, take a deep breath. Foolish investors maintain calm in moments like this because they keep their view squarely on the long-term macroeconomic landscape.

Since I recently reiterated my outlook for both coal and aluminum equities, and my position on gold and silver is no secret, let's take the opportunity presented by this lingering sell-off to discuss the outlook for another soft metal: copper.

While I have generally criticized industry analysts for failing to issue realistic price forecasts for commodities, Citigroup mining analysts Alan Heap and Alex Tonks have restored some of my faith in recent days. These guys called the huge spikes in coal and iron ore prices as early as September of last year, so when they substantially upgrade their outlooks for both coal and copper in the midst of a dramatic sell-off, I am inclined to take note.

Heap and Tonks believe the "copper price is bottoming, and will move sharply higher in 2009 and 2010." The analysts defined what they mean by sharp, raising their 2009 price forecast from $3.50 to $5.00, and their 2010 forecast from $3.00 to $5.50. These are huge adjustments.

As the basis for their adjustments, Heap and Tonks point to 15% annual demand growth from China as that country continues to build out infrastructure such as roads, railways, airports, and seaports. Moreover, looming power supply disruptions in Chile and Central Africa, water shortages in China and Latin America, insufficient global supply of the sulphuric acid used to refine copper, and rising fuel and freight costs all will combine to press copper prices higher.

Fortunately, many of the best choices for exposure to copper are presently on sale. I have recommended Southern Copper (NYSE: PCU  ) in the past, and since the mining strike in Peru ended Sunday night, I believe these shares are once again attractive. Teck Cominco (NYSE: TCK  ) has substantially expanded copper production of late, and offers bonus exposure to metallurgical coal. Freeport-McMoRan (NYSE: FCX  ) has had a 16% haircut since mid-June, and has the added advantage of significant gold exposure. Megametal giants like Rio Tinto (NYSE: RTP  ) and BHP Billiton (NYSE: BHP  ) are also looking cheap here, and provide exposure to multiple commodities under one roof.

Complex issues are shaping commodity-related markets. If you would like some help staying on top of it all, join the Motley Fool CAPS community to gain insight from a talented group of individual investors. It's free and fun!

Further Foolishness:

Fool contributor Christopher Barker wonders when they will issue a copper bullion ETF. He can be found in the CAPS community under the username TMFSinchiruna. He owns shares of Southern Copper, Taseko Mines, Freeport-McMoRan, and BHP Billiton. The Motley Fool has a copper-clad disclosure policy.

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