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Disciplined long-term investors may scarcely have noticed, but prices for both copper and the shares of companies that produce it were swept into weakness along with the broader commodities sell-off that gripped the markets in recent weeks.
Observing an uncommonly bullish pairing of both near-term and long-term factors influencing copper supply and demand, I urged Fools back in December to consider copper as a compelling investment opportunity for 2011 and beyond. Ever the uncanny oracle for anticipating near-term market swings, Goldman Sachs then issued advance warning for a dip in prices across multiple commodities in April, and singled out copper as "vulnerable to slowing observed demand." Call it a Foolish sixth sense, but I closed my bullish CAPS pick for the Global X Copper Miners ETF (NYSE: COPX ) a few days before that warning was issued.
Now, just weeks after sounding the alarm, Goldman Sachs is back to sound the all-clear for commodities; particularly copper, zinc, and oil. With that call, Goldman reiterated the very same 12-month price target for copper ($11,000 per ton) that the bank initially forecast back in December, and called the malleable metal "an attractive opportunity." One might reasonably interpret the past six months, then, as something of a head-fake that inserted a pause into the long-term upward trend.
Copper's mounting supply crunch
No doubt contributing to Goldman's abrupt about-face, Barclays Capital reveals that first-quarter copper production from the world's major mines came in substantially lower than analysts had anticipated, forcing a downward revision of full-year 2011 mine supply from 16.1 million tons to 15.7 million tons. Barclays Capital concludes that "although expectations were broadly in agreement for stagnant mine supply growth in 2011, the outturn of available data so far points to an even worse picture evolving which should offer some upside support to copper prices."
Exacerbating supply concerns, the political landscape for mining in Peru -- the world's second-largest copper producer, after Chile -- is becoming increasingly problematic. That miners' unions are poised to initiate a strike within days is not by itself unusual -- not by a long shot -- but coupled with an ultra-high-stakes run-off presidential election on June 5, uncertainty abounds. Peruvian authorities blocked Southern Copper's (NYSE: SCCO ) proposed Tia Maria copper mine, while anti-mining protests in select regions have reportedly prompted bureaucratic responses that could delay mine permitting procedures.
The bullish long-term outlook for global copper demand that led Joy Global to call copper "the commodity with the strongest fundamentals" remains fully intact. Against that backdrop of expanding demand lies the true crux of the supply crunch: a declining average ore grade, reflecting Freeport-McMoRan Chairman James Moffett's noteworthy assertion that "the major copper reserves that are being produced today come from 100-year-old mines, with few exceptions."
5 ways to play
Accompanying the 23% increase in the price of copper that Goldman Sachs anticipates over the next 12 months, Fools would be wise to anticipate significant outperformance of the market by quality low-cost copper producers. With multiple vehicles to choose from, the next obvious step is to identify the likely outperformers from within the world of copper.
For those preferring a basket approach through a copper equity ETF, I must concede that a closer look leads me to prefer the First Trust ISE Global Copper Index Fund (NYSE: CU ) over the Global X Copper Miners ETF. Led by enticing top-three positions in Freeport-McMoRan Copper & Gold (NYSE: FCX ) , Rio Tinto (NYSE: RIO ) , and Ivanhoe Mines (NYSE: IVN ) , the First Trust vehicle is more heavily weighted in stocks that I would hasten to recommend individually in their own right. Foolish stock pickers, meanwhile, will wish to recall that Taseko Mines (AMEX: TGB ) continues to pursue multiple paths to prosperity, including its recent decision to execute an ambitious phase three expansion plan for its 75%-owned Gibraltar copper and molybdenum mine.