This is the Yahoo Canada top headline right now. However, they fail to define "depsite" in the article...
Copper outlook still positive depsite 8% price drop so far in '07
Sun Jan 14, 3:32 PM
ca.news.finance.yahoo.com
By Romina Maurino
TORONTO (CP) - Copper may have started the year with a thud following a stellar 2006, but that's no reason to turn away from the red metal, whose price outlook will be strong enough to reward those who continue to invest in it.
"A lot of this is a knee-jerk reaction, the market is discounting a much bigger correction in cash flows and in the underlying commodity than will likely occur," said Bart Melek, a senior economist at BMO Capital Markets.
"Relative to 2005, when the average price was about $1.57, 2006 was $3.06 - people made an awful lot of money."
The metals and mining sector was behind much of the Toronto stock market's main index 14 per cent surge for the year, with the metals and mines sector up 60 per cent.
But copper has fallen eight per cent since the start of the year, as metals led a slump in the TSX's main index for the first trading week of the new year. On the New York Mercantile Exchange Friday, it closed at $2.60 per pound, down six cents.
BMO's price price outlook for 2007 pegs copper at $2.80 and forecasts $2.30 for 2008. Melek said prices will be below three dollars "for a while."
Still, he said: "Anything at this level essentially means that copper companies are making really good money."
Kerry Smith, an analyst with Haywood Securities, attributed the current weakness to technical selling when the metal began softening in late December.
"A lot of the funds have now started to sell, they're all nervous about what the global growth is," he said.
A slowdown in the U.S. economy and housing sector, which uses copper in home construction - as well as a rise in inventories - have also darkened the mood on the metal.
"We had quite a bit of a housing correction in the United States, where housing is now considered to be somewhat oversupplied on the new home side, prices are down, and of course, the auto sector in North Amercia isn't doing fabulously well at all," Melek observed.
Markets consider that "there may be too much copper around, so there doesn't need to be a huge risk premium associated with it."
Smith expects copper to continue to slip during the year and end 2007 around $2.40 or $2.50, saying it can drop as low as $2.25.
But while inventory surpluses remain a concern, the overflow isn't huge, and "any little production hiccups will tend to exacerbate the problems in the markets," he said.
In August, a strike at BHP Billiton's massive Escondida mine in Chile raised concerns about surging prices, as copper, zinc, nickel and other base metals' prices skyrocketed because of soaring demand from China and India.
Interest in metals also peaked last year because of bids for nickel miners Inco and Falconbridge, which involved Phelps Dodge Corp., an Arizona-based copper firm, as well Vancouver's Teck Cominco Ltd. (TSX:TCK.B).
"For the stocks themselves, I think that most of the damage has already been done," he said, adding copper company stocks don't typically pay much in the way of dividends.
"The only reason to own them is for capital gains, and I would think that the stocks this year aren't going to have much in the way of price appreciation because I think the metals price will slowly slip."
But BMO's longer-term outlook for the sector remains positive because "once the winter is over and done with and we head for Q2, demand is going to perk up," Melek said.
"Anything over $2 is pretty stellar. No matter how you cut it or slice it, it's a very good price."
Lower prices could also lead to more consolidation, deals that could involve Aur Resources Inc. (TSX:AUR), Inmet Mining Corp. (TSX:IMN), First Quantum Minerals (TSX:FM) and Lundin Mining Corp. (TSX:LUN).
"It would probably wind up being mergers amongst equals," Smith said.
"I don't think any of the bigger mining companies are going to have that much interest in buying this mid-tier group, but I think there would be some opportunity that this mid-tier group could see some consolidation." |
