Why shares in Oz Minerals Limited and Sandfire Resources NL could jump next week

Shares in mining companies are on the back foot as the price of copper and other hard commodities fell but things could dramatically change next week as UBS is tipping that copper prices will surge from March 1.

That would be welcomed news for the sector as industry leader BHP Billiton Limited (ASX: BHP) sheds 1.6% to $30.92 while the S&P/ASX 300 Metal & Mining (Index:^AXMM) (ASX:XMM) index tumbles 1%.

But copper producers are likely to come back into favour if UBS’ prediction of a “dislocation” in the scrap metal market comes to pass.

As part of the Chinese government’s drive to stop other countries from sending their crap (I mean poor quality scrap) to China for recycling, authorities there are imposing stricter controls on the import of copper scrap starting from next month.

China also has imposed stricter controls on paper and other recyclables in an effort to control pollution in its country.

UBS believes this will materially tighten the copper trade and drive prices higher, although no one can quite quantify the upside at this time as it is difficult to say how strict Chinese custom authorities will be.

“Traders and copper companies estimate the potential disruption with a wide range of 150-500ktpa of contained copper, but profess low confidence in these numbers,” said UBS.

“We estimate the impact to be ~400ktpa, or ~2% of global refined copper demand. The impact could be higher if customs officials are strict [and] we think there is an asymmetric price risk on the upside for copper during 2018Q2.”

China derives around 1.3 million tonnes of copper a year from scrap and the government’s new policy will cut off traders by only allowing scrap imports to be sold directly to end users.

China will also limit impurities in scrap to 1%, which will affect many products, and reduce trade quotas.

While that could push low quality and more environmentally polluting scrap to other emerging countries, this will take time.

Quantifying the impact of the new policy is also made more difficult from mine disruptions that were prevalent in 2017.

Supply could be more dependable this year and that will add around 300,000 tonnes a year to the market. But as the broker notes, miners in Chile are negotiating new wage contracts with mining companies and that puts two thirds of the country’s six million tonnes a year copper output at risk from strike action.

We might have to wait till April when China’s customs department releases its monthly report to gauge the impact of the new policy but there are certainly reasons to feel optimistic, particularly towards more copper-focused miners like Oz Minerals Limited (ASX: OZL) and Sandfire Resources NL (ASX: SFR).

Having said that, other non-copper miners may also benefit from this thematic as higher copper prices are likely to also pull other industrial metals higher. They don’t call the red metal “Dr Copper” for nothing.

On the flipside, the stricter import control is probably bad news for scrap dealer Sims Metal Management Ltd (ASX: SGM) and that’s why UBS is telling investors to sell the stock.

There are other stocks that are well placed to benefit from “disruption”. The experts at the Motley Fool have uncovered three of their favourite disruptors for 2018.

Click on the free link to find out what these stocks are.

The Disruptors: 3 Revolutionary Aussie Companies to Back for 2018

We're living in one of the most exciting times in investing history. Innovation and a booming culture of entrepreneurship are constantly creating new companies with the potential to make forward-thinking investors very rich. Now more than ever, one small, smart investment could make a huge difference to your wealth.

That's why at The Motley Fool we've been scrutinizing the ASX to uncover the kinds of companies that we believe could turn into the next Cochlear or REA Group.

We've found three exciting companies that we believe re poised to perform in the new year. Click here to uncover these ideas!

Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited. The Motley Fool Australia has no position in any of the stocks mentioned. 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. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.