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Investors Take Notice: Copper is Beginning to Shine Again in China

By Reuben Gregg Brewer – Jan 10, 2014 at 10:27AM

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Copper is setting up to be a bright spot in the mining sector, with Chinese imports showing just how in-demand the vital metal is. Will Southern Copper Corp, Freeport-McMoRan and Joy Global cash in?

Mining companies have been under pressure from a buildup of supply and a down-tick in demand. That's left materials like iron ore and coal in a weak price trend despite still strong demand in key markets like Asia. One commodity, however, appears to be bucking the broader trend -- copper. 

Key for growth
Like iron ore, copper is a necessity for economic development. For example, Southern Copper (SCCO -0.58%), one of the largest copper miners, notes that nearly two-thirds of the copper used in the world goes to Asia. China alone accounts for 41% of global consumption.

That makes China a big player in the copper world. And if Southern is right, the giant nation is set to get even more important as its share of the copper market grows to 45% over the next five years. What's going on in China that supports such robust demand? New buildings, new power plants, and the manufacturing of electronics gear. Those particular end uses account for more than 60% of the copper market.

And, unlike iron ore and coal, which face subdued demand in developed markets that are growing slowly, copper is a key feature in the high-tech gadgets that are changing the future across the globe. So even though the United States and Europe are mature markets, the ravenous appetite for Apple's iPhones and iPads, among other tech gear, still also support copper demand.

The big market
Still, the big market is the one to watch right now, and that's China. And through the first 11 months of 2013, copper imports rose more than 30%. That type of demand growth, even if it slows from these levels, is a huge support for the metal. China's iron-ore imports also increased an impressive 10% or so, which should be a support for that market too, right? The key difference is supply.

While new production in iron ore has kept pricing weak in that market, according to mining- equipment maker Joy Global (JOY), copper supply and demand are "relatively balanced." In fact, the company counts sales to copper miners as one of the few bright spots in its portfolio.

Perhaps more important for you, Joy says that copper is "the most attractive investment in mined commodities." A big part of that is the fact that "inventory levels have decreased 30[%] since the beginning of [2013]" on top of continued solid demand.

Although Joy Global's outlook is pretty bleak for 2014 since the only silver lining it sees today is copper, the impressive growth in Chinese demand on top of limited supplies suggests that Southern and Freeport-McMoRan Copper & Gold (FCX 0.36%) could both see solid years.

Freeport shares, however, have been moving higher since the company bought its way into the oil and gas market in the middle of last year. That diversification effort has clearly been well received by the market, but a 40% upturn since mid-2013 limits the upside potential even if the company's copper business does well. Rio Tinto (RIO -0.09%) and BHP Billiton (BHP 0.04%), both large copper miners, are down and out but have much more exposure to the relatively weak iron ore and coal markets.

So while Rio and BHP will benefit from a solid copper market in 2014, the duo will still be driven by the demand for steel. That leaves Southern Copper as, perhaps, the best option if you are looking for copper exposure.

All eyes on China
Iron ore and coal miners like Rio and BHP are looking to India to help equalize supply and demand for their core commodities as China's growth slows down. Copper miners Freeport and Southern Copper, however, can still count on the giant nation to keep profits strong. If you like the picture Joy Global is painting for the metal, make sure to keep a keen eye on China for evidence of continued strength. And start your research with still relatively cheap Southern Copper.

Not ready to invest in copper in 2014? Try our "Top Stock" for the new year, instead:

Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Freeport-McMoRan Copper & Gold. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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