There are encouraging signs that fortunes are turning for the copper market as investors are starting to look at fundamentals of the commodity instead of sentiment.
The price of the red metal bounced from two-week lows in overnight trade after copper inventories fell to their lowest level in 13 years, according to Reuters.
Oz Minerals share price has fallen 18% since June this year and Sandfire Resources share price has shed a third in value over the four months when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is down only around 6%.
But their underperformance could come to an end if the market starts to shift from worrying about trade wars and a sharp slowdown in China’s growth to the supportive fundamentals for the commodity.
Fears of a looming shortfall of supply over the medium-term due to underinvestment in finding new copper ore bodies have been brushed aside as trade tensions between the US and China dominate the headlines.
Copper stockpiles at London Metal Exchange (LME) certified warehouses that are not earmarked for delivery have fallen overnight by 9150 tonnes to 72,625 tonnes – the lowest since December 2005.
The big drawdown in inventories will serve as a good reminder to traders not to become too bearish on the commodity following the metal’s 16% price drop since the start of the year.
It’s probably the recognition of copper’s good medium-term fundamentals that has prompted South32 Ltd (ASX: S32) to enter into an option agreement with Triology Metals Inc. as the ASX miner tries to gain exposure to the commodity.
BHP Billiton Limited (ASX: BHP) refused to give it any of its copper assets when it spun-off South32. BHP Billiton owns a close to 60% stake in Escondida – one of the world’s largest copper mines.
This isn’t the reason why BHP Billiton’s share price has performed much better than others in the sector, but it could help fuel the next leg-up in its share price.
Let’s also not forget that copper’s recovery is likely to bolster prices of other industrial metals too. Copper is seen to be a lead indicator hard commodity market and it hasn’t been bestowed the title of Dr Copper for nothing.
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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and South32 Ltd. 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 Scott Phillips.