Copper Selloff Creates Buying Opportunity - TheStreet

Copper Selloff Creates Buying Opportunity

Industry analysts consider the past week's selloffs as overdone since the medium- to longer-term fundamentals for base metals, especially copper, remain strong.
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NEW YORK (TheStreet) -- Stocks of major copper producers corrected sharply during the past week on the back of broad selloffs. Freeport-McMoRan Copper & Gold (FCX) - Get Report, Teck Resources (TCK) and Southern Copper (SCCO) - Get Report shed 10.5%, 11.0% and 10.3% of their respective market values during the past week, and posted declines of 21.1%, 24.0% and 21.4, respectively during the past one month.

These stock prices were driven by the decline in copper prices. Copper had its worst week in three months last week on demand concerns. The London Metal Exchange copper for three-month delivery tumbled 6.5% past week. The selling was prompted by Europe's debt crisis and the concern that the phenomenal growth in China's demand for raw materials may slump as the country adopts measures to rein lending.

However, today these concerns have subsided, saving the day for copper. LME copper for three-month delivery increased 3.2% to $7,164 a metric ton, as European policy makers unveiled a rescue package to control the sovereign-debt crisis that reversed the region's economic rebound. The euro appreciated 3.7% against the yen, the highest percentage increase since November 2008, early today on the expected rebound as governments of the 16 euro nations agreed to lend as much as 750 billion euros ($962 billion) to the countries under the crisis.

Meanwhile, China's copper and product imports increased 9% from a year earlier. In April, China's copper imports stood at 436,345 metric tons, down 4.4% from last month's 456,240 metric tons, but up 9% over the prior year 399,830 metric tons, as per

Bloomberg

.

The premium paid by China's importers, a good demand indicator, increased to $70-$100 per metric ton over the LME cash price last week, up from the $60-$80 range last month, according to

Bloomberg

.

Industry analysts consider the past week's selloffs as overdone even though China's imports may ease in the short-term, since the medium- to longer-term fundamentals for base metals, especially copper, remain strong.

Copper fundamentals will likely strengthen as the demand from developed countries continues to restore in addition to the robust demand, although slowing from the emerging economies. Stock prices of all copper producers are positively correlated to copper prices, implying that any significant improvement in copper prices will likely boost the producer stock prices.

In the past month, China has moved to curb loans for third-home purchases and raised the down-payment requirements. The demand downturn from this segment will be offset by the robust demand from construction sector, required for the massive urbanization in the country.

Last year, China's copper and product imports escalated by 63% to 4.29 million tons and the metal prices more than doubled, riding on the back of the country's $586 billion stimulus package toward infrastructure development.

For the first quarter of 2010, Freeport, Teck Resources and Southern Copper reported robust earnings, attributing the outstanding performance to higher copper prices that almost doubled in a year. Currently, Freeport, Teck Resources and Southern Copper are trading at attractive price-to-earnings multiples of 8.31, 9.63 and 12.90, respectively.