Copper prices are on the rise again. How do I know? I just received this alert from my local police department:
"Recently there has been a spate of fairly brazen thefts of copper gutters and downspouts from homes in Old Town, some in broad daylight, by persons who appear to be working as contractors. ... If you have copper gutter/downspouts, or know that your neighbor(s) do, please be aware of the problem and let your neighbors know."
This burglar is playing a trend -- albeit illegally -- that we should all be smart enough to see coming: a resumption in the rise of copper prices caused by consumption growth in China. The good news is that you can make money on this trend without resorting to petty crime, and by the end of this article, I will have told you how to do it.
Some background
First, it's important to remember that copper demand overall is down this year, because of the global economic downturn. In fact, consumption declined 15% in the first quarter. Yet there has been a strong rebound in prices over the past six months, as China has stockpiled the metal to use later in the country's massive infrastructure expansion plans. (Copper is a key ingredient in electrical wire, as well as in water pipes.)
Today, however, the market is concerned that China's stockpiling has ended and that copper prices will decline again. Our aforementioned thief, however, suspects differently.
And I suspect he's right
While copper prices -- like all commodity prices – will be volatile, our analysis at Motley Fool Global Gains tells us that the long-term trend from here will be up. That's because the Chinese government, for myriad reasons, is engaged in massive infrastructure and economic-development projects in the western and rural parts of that country. Further, as that country gets wealthier, it's going to see greater and greater electricity demands, which will require substantial electricity grid modernization, including plans for a unified national grid. Again, copper is key.
All of this activity prompted Chinalco (NYSE: ACH ) -- China's state-run metals and mining giant -- to forecast in 2007 that demand for base metals in China will stay strong for "the next 10-plus years." Yes, the global economic downturn has intervened, but the same long-term demand fundamentals remain in place. That's why Chinalco is looking to expand its copper production and also why it's pursued megadeals with the likes of Rio Tinto (NYSE: RTP ) and Alcoa (NYSE: AA ) .
How you can profit from the trend
The obvious way to capitalize on this trend is to buy shares in the miners -- companies such as Chinalco, Rio Tinto, Southern Copper (NYSE: PCU ) , BHP Billton (NYSE: BHP ) , and Anglo American (Nasdaq: AAUK ) . But we've thus far not done that at Global Gains because, again, commodity prices are volatile and these tend to be capital-intensive businesses.
Indeed, there's a time arbitrage element to our metals strategy. In other words, we know prices will go higher, but we don't know when they will go higher. Thus, we're interested more broadly in companies and countries that will benefit as metal prices rise but won't have their fair value dictated solely by metal prices.
For example, I recently called Peru the best little investing opportunity I know. That's because the country is a significant exporter of copper and also happened to recently sign a free-trade agreement with China. But rather than owning the miners in Peru, we think you're better off with superior consumer and financial plays. Similarly, you have the picks-and-shovels plays like Caterpillar (NYSE: CAT ) .
The bigger, broader takeaway
Yet copper is just one of the many enormous global investment opportunities that China's economic development is creating for investors. There are also strong cases to be made for investing in the energy, agricultural, and consumer sectors.
At Global Gains, we're committed to helping more American investors identify and get comfortable with investing in promising Chinese stocks. That's why we travel to the country annually and sit down with analysts, economists, and company management teams.
In fact, we're getting ready to travel back to China in early July, and I invite you to sign up to receive all of our real-time research dispatches from the road for free. We make these dispatches available to all investors -- not just our members -- because we feel strongly that more Americans need to learn about the rising power that is China.
If you agree and wish to sign up, simply provide your email address in the box below.
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