Dr. Copper: Sending Pullback Signal? - Analyst Blog

Copper has long been called the “metal with the PhD” or the “smart” metal because of its apparent ability to predict changes in the economy based on metal demand and pricing. Copper is used in many industrial capacities, but especially in piping in residential and commercial construction.

On Mar 6, we discussed the signals copper was sending about the status of the global economic recovery as metal prices were soaring but the stock market was not in a blog post called Dr. Copper Sends Signals.

Back in March, copper and copper stocks were behaving differently from the rest of the market. Copper mining stocks hit their lows in November and then roared from there. They were not hitting new lows in March like the rest of the overall stock market.

Copper was also on a tear at that time, hitting a 3-month high on Mar 6.

Copper prices and copper stocks were both sending a signal of the bull to come.

Copper mining stocks are jumping

The copper miners have rallied big in the last 11 months.

Southern Copper Corporation (PCU) is up 200% off its November lows. It is now a Zacks #1 Rank (strong buy) stock as estimates are rising. See the Oct 1 Momentum Rank Buy for all the juicy details.

Southern Copper is more expensive than when we last looked at it on Mar 6. Back in March it was trading with a forward P/E of 9.15 and now it’s got a hefty P/E of 33.

Freeport McMoran Copper & Gold Inc. (FCX) has seen its stock soar 292% off its Nov 20 low of $17.27.

The Zacks Consensus Estimates have moved sharply higher. The 2009 estimate has more than doubled to $3.22 per share from $1.44 in just the last 3 months. Analysts are equally as bullish on the 2010 estimates which are even higher at $5.49 per share. FCX is also a Zacks #1 Rank (strong buy) stock.

Indian copper miner Sterlite Industries India (SLT) also saw its lows on Nov 20 and has since gained 306%.

Sterlite, however, is a Zacks #3 Rank (hold) stock. The fiscal 2010 Zacks Consensus Estimate is calling for earnings per share of 74 cents, with one analyst raising in the last week. Once again, analysts are more bullish about next year, as fiscal 2011 Zacks Consensus Estimates are holding at $1.23 per share.

What’s the signal now?

Copper prices were still bullish in the third quarter of 2009. Prices rose 24% in the quarter and hit a peak in August of $2.9895 a pound. Comparatively, on March 6, prices hit a then 3-month high of $1.65 a pound.

But some signs of trouble have appeared in the copper market. Copper imports have slowed into China, some of which was expected given the big purchases in the first six months of the year as the Chinese stimulus plan kicked into gear. Chinese imports fell 13.9% in August from July.

Inventories in London, however, are at their highest levels since May suggesting that without China there isn’t much other worldwide demand. The result has been a weakening of prices as copper fell 11% in September.

The copper fundamentals are no longer as bullish as March. With copper now weakening, Dr. Copper could be signaling a slowdown in the recovery that is soon to come.

Copper stocks have had a nice upward trajectory off the November lows. However, in September, the stocks made fewer new highs as copper prices fell.

Is this stock weakness another signal?

See the six month charts of PCU, FCX and SLT below: