The Best Way to Ride Copper’s Rebound

11/22/2011 4:15 pm EST

Focus: COMMODITIES

Jim Jubak

Founder and Editor, JubakPicks.com

If you’re like me, the second quarter of 2012 seems a long way off, and the idea of buying anything seems, well, just plain stupid.

But I think it’s worth paying attention to this report on copper out of Goldman Sachs (GS) yesterday. It’s just the kind of long-term thinking—what does it say that I’m calling six months long term?—that we could all use a dose of in a market like this.

Copper may be set for a strong rally in the second quarter of 2012, Goldman says. And its argument is a reassuringly familiar one: Demand—even demand depressed by a low-growth United States and a no-growth Europe—will exceed supply by 180,000 metric tons in 2012. That will follow upon a deficit of 176,000 metric tons in 2011.

And since the laws of supply and demand haven’t been repealed, even in the current global economy, that will end the current bear market in copper, pushing prices to $8,000 a ton over the next three months and $9,500 by the end of 2012.

Copper has tumbled from a record high of $10,190 a metric ton in February to $7,356 at Monday’s close in New York.

The supply shortfall and the recovery in copper prices won’t be the result of a big resurgence in demand. If that were Goldman Sachs’ argument, I wouldn’t be paying any attention to Goldman’s thinking.

Goldman’s projections, in fact, assume that Europe—a region that accounts for abut 20% of global copper consumption—will see little or no economic growth in 2012.

No, the positive fundamentals for copper prices are on the supply side, where production disruptions and delays in bringing new mines into production have resulted in actual additions to supply lagging projections.

For example, workers have been on strike at Freeport McMoRan Copper & Gold’s (FCX) Grasberg mine, the source of almost 4% of the world’s copper, for two months. Union officials announced last week that the strike would stretch until at least December 15.

The result, Goldman calculates, is that copper supply in 2011 will be flat with supply in 2010, because of disruptions and delays that have cut production below plan by 1.05 million tons.

For 2012, Goldman is calling of supply to grow by about 4.3% from 2011. That should be enough to keep up with a very modest increase in copper demand from China, as a result of Beijing’s drive to build more low-cost housing and to expand its electrical infrastructure. The result will be, Goldman projects, a shortfall that’s just slightly above the 2011 supply deficit.

Freeport McMoRan Copper & Gold would be my pick for how to play that shortfall and the subsequent increase in copper prices. The company will see its own production rebound in 2012, once the Grasberg strike is over.

The stock is a member of my Jubak’s Picks portfolio with a current target price of $55 by June 2012. However, that target is a little aggressive both on price and timing, given the way the Euro debt crisis has crimped growth everywhere.

As of November 22, I’m setting my target price at $51 a share and extending the time frame to September 2012.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares in Freeport McMoRan Copper & Gold as of the end of September. For a full list of the stocks in the fund as of the end of September, see the fund’s portfolio here.

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