While much of the discussion around U.S. markets this year is focusing on the Fed and potentially stubborn inflation, China’s economic reopening is a major investing theme that could drive commodity prices higher.
Indeed, as a recent Bloomberg article pointed out, China’s reopening is set to “provide a welcome boost to global growth” at a time when weakness in Europe—and a potential recession in the U.S.—is a concern for investors.
However, should China’s manufacturing output rebound and its economy strengthen, it would also mean inflation isn’t likely to abate anytime soon. A stronger China means that the nation’s industrial sector will be voraciously consuming a growing amount of raw materials, including metals and oil, which will put upward pressure on the prices of these commodities globally.
This is a potentially bullish outcome for commodities investors.
Metals prices will be especially vulnerable to price increases as China’s manufacturing output rises, with copper being a prime beneficiary of this development.
As the world’s largest consumer of copper, at over 50% of global production, China’s industrial demand for the metal is expected to soar this year. Indeed, Chinese imports of copper concentrate are already up over 9% in the first month of 2023.
Meanwhile, in the U.S., the recently passed Infrastructure Act is further expected to contribute to dramatically higher domestic levels of copper use—for things like renewable power generation, transmission lines and electric vehicle charger networks—while the CHIPS & Science Act will allocate spending for new semiconductor facilities that require lots of copper-based electrical infrastructure, providing copper with a potentially significant tailwind going forward.
After spending much of 2022 in the doldrums, copper future prices are up 30% right now from last year’s low. Moreover, a growing number of industry analysts expect the red metal’s price to recover to last year’s record high of $5 per pound—a 20% increase from current prices if realized.
With this in mind, let’s look at a couple of copper mining plays that stand to benefit if China’s economy roars back this year.
2 Copper Stocks for China’s Recovery
Freeport-McMoRan (FCX) is no stranger to hard asset investors of the last few years. The stock had an extraordinary two-year run after the pandemic-led crash of early 2020 before hitting a wall last April. The stock took a tumble into the summer months, with shares being cut in half. But as it became clear China would be dropping its Covid-zero policy—and copper prices would consequently strengthen—FCX made an impressive comeback of its own starting in October. The stock has since maintained a steady march higher along its 50-day line and is so closely aligned to the copper price that owning some FCX can be considered a proxy for the metal itself. Wall Street doesn’t expect much in the way of earnings growth this year but sees steady bottom-line strength starting in 2024 and beyond. The earnings outlook conservatism is likely due to institutional reticence over China’s full reopening this year. But the Street’s modest 2023 expectations for the company will likely be upset (i.e. bullish for FCX) as long as China doesn’t backslide on the Covid policy front.
Southern Copper (SCCO) is a leading miner, smelter and refiner of copper, molybdenum, silver and zinc, with most of its most of its mining operations in Mexico and Peru and exploration activities in Argentina, Chile and Ecuador. Copper represents most of Southern’s sales, and the firm is the world’s fifth-largest copper producer with the biggest reserves and longest combined mine life of all major producers. A combination of a weaker U.S. dollar (in which copper is priced worldwide) and China’s reopening is a big part of what’s driving Southern’s strength. And with copper prices rebounding while the company’s copper production is increasing (it rose 11% in Q3 from Q2), analysts expect revenue to jump 16% sequentially when the company reports Q4 earnings. I view the stock as another ideal vehicle for riding copper-related strength in 2023.