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Copper Facing Short-Term Headwinds

Freeport McMoran and Southern Copper are the best placed companies to overcome the weakness in copper prices.

Shanghai copper futures lost nearly 2% during trading Monday as investors raised concerns over China's inflationary pressure. Prices recovered following news of a mine halt due to power outages at Chile's

Codelco

, the world's largest copper producer.

Government data released last week showed that consumer prices in China jumped 2.7% in February while industrial output for the first two months this year gained 16.2%, the highest in five years.

China's central bank governor Zhou Xiaochuan told reporters at a session of parliamentary meetings held in Beijing Sunday that the latest inflation data hasn't altered policy plans. "Economic data, including inflation, are a bit higher than our forecasts, but not much higher, and we can still act according to our plans," Zhou said.

However, investors seem concerned that rising inflation in China could lead to a tightening monetary policy which will impact the country's copper imports. Copper prices dropped about 1.4% last week, closing at $7,412 per ton for spot delivery on the London Metal Exchange.

Copper consumption is yet to fully recover in China with inventories at warehouses monitored by the Shanghai Futures Exchange still at record highs. Total copper inventories last week stood at 205,886 tons, up 11% in a week and up 63% since the beginning of the year.

While copper warehouse stocks on the LME have dropped about 4% in the last month to 532,575 tons, inventories are still at multi-year highs. Experts reckon that though copper is set for a rebound over the next couple of years, a short-term correction is likely on the cards.

Analysts polled by

Bloomberg

expect copper prices to average $6,944 during the second quarter, year, down 3.5% from an average $7,182 during the first quarter. Prices are expected to drop a further 5% during the third quarter to $6,600 before recovering strongly during the fourth quarter and into 2011.

Freeport, Southern Copper Best Placed to Overcome Weakness

Freeport McMoRan

(FCX) - Get Freeport-McMoRan, Inc. Report

remains our top pick in the sector. According to the Street's Analyst rating guide, Freeport has 13 buys, five holds and one sell rating. In addition to a strong track record and improving financials, the stock trades at a discount to peers

Teck Resources

TheStreet Recommends

(TCK)

and

Southern Copper

(SCCO) - Get Southern Copper Corporation Report

.

CEO Richard Adkerson said last week the company is close to reaching an agreement with the Congo government to expand its huge copper and cobalt mine at the Tenke Fungurume project in the central African nation.

Apart from strong organic growth the company is also well-positioned to make opportunistic acquisitions. The company may raise as much as $1 billion early this year selling a 9.36% stake in its Indonesian unit to the provincial government, according to reports.

"Our company is situated today with its financial resources and access to capital to take advantage of an opportunity if it comes to us in an attractive fashion," Adkerson said at the

Reuters

Global Mining and Steel Summit last week. He added, "And you can be assured that bankers are lined up at our offices, coming in with opportunities regularly."

Meanwhile, Deutsche Bank upgraded its view to buy from hold on Southern Copper last week and raised its price target by $3 to $38, which is nearly 20% higher than Friday's closing price of $31.98. The firm cited rising metal prices and valuations for the upgrade.

During the past month, stocks of copper producers Freeport, Southern Copper and Teck Resources have returned 9%, 7% and 13%, respectively. In comparison the

S&P 500

and

Dow Jones Industrial Average

have appreciated 6.8% and 5.1%, respectively.