After months in the doldrums, copper prices look set to surge once again.
There are two broad reasons. First is that there are dwindling supplies of the metal, which among other things gets used for electrical wiring. The second is that China's economy likely will not deteriorate much more, analysts say.
Investors wanting to profit from the likely move should consider buying long-dated copper futures contracts on the CME futures exchange. Or try buy shares in copper miners such as Freeport McMoRan (FCX) - Get Freeport-McMoRan, Inc. (FCX) Report or South Copper Corporation (SCCO) - Get Southern Copper Corporation Report .
Futures prices for high-grade copper could wind their way to $3.35 a pound, up around 16% from a recent level of $2.896. Prices for the metal mostly bounced between $2.60 and $2.80 a pound from early July through mid-February, according to data from Bloomberg.
But now the market's grind higher may have started.
"I see the price moving steadily higher for the next four to six quarters," says Jeff Christian, managing director of New York-based commodities consulting firm CPM Group. His initial price target is around $3.08 followed by a further move to $3.35.
But don't expect the price to shoot higher like a ball out of a cannon.
"I think it will go higher not sharply higher," he says.
Dwindling Metal Supplies
Part of the reason for being bullish is that over the past few quarters the market has moved from being in a so-called surplus to being in a deficit. That means that currently more metal is being used than is being produced.
In other words, the metal is in increasingly short supply.
One indicator of that supply crunch is the dwindling level of copper inventories held in London Metal Exchange warehouses. Stocks of the metal totaled 120,000 metric tons as of March 7, down from more than 300,000 tones a year ago, according to metals markets website Kitco.com.
That market tightness will be here for a while, experts say.
Los Angeles-based finance firm Guild Investment Management sees the supply deficit lasting at least through the rest of this year. It also thinks there is potential for growth in demand as well.
"Sentiment about the strength of the world's largest economies turning positive suggests that copper, in particular, has a lot of room to run," states a recent report from Guild Investment Management. "Copper is highly leveraged to sentiment about the global economy."
Or put simply, when the world's economy does well then copper prices tend to rally. And it also works vice versa.
The most important country to watch for economic health is China, the second-largest economy after the United States. In recent history, China has also been a voracious consumer of metals of all types and copper in particular.
Lately, China's has seen its factory economy contract, but analysts say that the worst could be over soon. That should be bullish for copper prices as China's demand for the metal starts to increase once again.
"China looks like it bottomed," says Frank Holmes, CEO and chief investment officer of San Antonio-based asset management firm U.S. Global Investors.
In January, the China Caixin Manufacturing Purchasing Managers Index (PMI), which measures the health of the factory sector hit 48.3 its lowest level in three years before bouncing back to 49.9, according to data collated by information website Tradingeconomics.
A PMI reading below 50 means that the factory sector is contracting. One above fifty means it is expanding, which is something that could come soon as the PMI bounced close to 50 last month.
If the U.S. and China agree on a trade deal, then expect the factory sector to jump back and with it, copper prices.
Longer term Holmes is bullish for the metal's prospects as well, due to the increased adoption of new-fangled technologies.
Electric vehicles (EV), and the data centers that power the internet's cloud functions, for instance, require masses of copper wire to operate,
EVs are fast taking off compared to a decade ago. And China now leads the way with more highway-ready electric cars on the road than any other country.
"It's a great metal if you believe in tech," says Holmes.
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Constable owns none of the securities listed in this story