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Copper Sector Set to Shine on Growing Demand

Stocks in this article: IMN IAU FCX HBM RIO S

NEW YORK ( TheStreet) -- Copper prices may have stalled, but a look at supply versus demand makes the industrial metal increasingly attractive.

Even though copper is down from its all-time high of $4.62 a pound, analyst reports continue to project that robust demand from China will help boost prices toward the end of 2011. On the supply side, analysts say that copper is in the midst of a worldwide production slump.

If you believe in construction and automobile growth in China and Japan, or even a housing rebound in the U.S., then you aren't far off from believing in the strength of the copper market. The base metal is used in wiring, roofing and industrial machinery, and often acts as a bellwether for economic health.

George Gero, a metals strategist at RBC Capital, says that on average, one automobile uses about 40 pounds of copper and one house averages about 400 pounds.

One automobile uses about 40 pounds of copper and one house averages about 400 pounds.

Since copper trends are tied to the fundamentals, the metal tends to be less volatile on a daily basis. "Copper is holding up well even in the midst of a perceived economic slowdown, says, independent trader Eric Zuccarelli.

Recent weeks have seen precious metals, crude oil, bonds and currency all fluctuating widely in reaction to even the most marginal developments in Greece. Investors making currency bets have already gotten burned in reversing trends in the euro.

Last week, commodities like gold took a pummeling from a broad market selloff as investors ran to the dollar. Fiscal fears in Greece were fading, but new speculation of a weak Italian banking system spooked Wall Street yet again. While gold sank as much as 2.6% for the week, copper weathered the mixed euro signals much better, finishing up 1.5% last Friday on the Comex.

"Once we get past the Greek crisis and the U.S. debt issue, copper will once again see new highs," said Zuccarelli, who's betting that copper will climb to $5 per pound by the end of 2011.

Supply to Lag Demand?

Goldman Sachs estimates a 4.7% growth in global copper demand but only a 2.1% growth in global copper production for 2011. Geopolitical uncertainties in countries with mining projects can hold back supply, and mining fields can take years to develop after they are discovered.

A June research report from Macquarie estimates that China's copper demand will grow at a clip of 6% and that the copper market is set to strengthen in the next two to three months. Growth in the power sector, which makes up more than 40% of China's end market for copper, will sustain demand in the long term, according to a Goldman Sachs research report.

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