Strategy

Sector outlook: Dr. Copper

Sectors in-the-know investors will definitely want to keep an eye on

If you want to know how the economy is doing, you just have to look at the price of copper. In fact, investors sometimes refer to the metal as “Dr. Copper: the only base metal with a PhD in economics.” It makes sense: copper prices, by way of example, have broken records over the past year as a result of the booming U.S. housing market and China's voracious appetite for just about all of the base metals. But if analysts' outlook for copper in 2007 is any indication, the doctor appears to be predicting mixed economic results.

The slowing U.S. housing market is one of the main reasons metals analysts at Merrill Lynch are predicting copper prices will fall to about US$2.40 per pound in 2007–down from the December spot price of about US$3.40 per pound. “We are particularly cautious on copper,” the investment house said in its metals and mining review published in December. Weaker copper demand and an increase in copper supply by the end of 2007 could drive prices as low as US$1.65 per pound in 2008, Merrill Lynch forecasts.

Not everyone is convinced that the party is over, though. China is the world's largest consumer of copper–which is used for pipes and electronic wiring in the construction and auto sectors–and there is plenty of evidence that it will gobble up more, not less, in the new year, according to John Reade, head of metals strategy in London for UBS Investment Bank.

While there is more copper supply scheduled to hit the market in late 2007 or early 2008, Chinese demand in the early part of the new year could push prices up to their previous highs, says Reade. “China has drawn down its copper stocks, and unless the country has a huge warehouse of copper up its sleeve that no one knows about, it will have to go back to the copper market in 2007,” he says.

China's still-booming economy will likely keep prices for all the base metals high over the coming year, says Patricia Mohr, vice-president and commodity market specialist at the Bank of Nova Scotia in Toronto. But weakness in the North American auto and housing sectors (both big consumers of copper) will likely mean that the record-breaking gains seen in 2006 will shift to other base metals such as zinc and nickel, or uranium, which is used in nuclear power generation. “China is the most important customer when it comes to base metals,” says Mohr. “And while China uses a lot of copper, it uses even more zinc and nickel.”