Commodity markets are a mixed bag at the moment. Some, like those in the copper sector, have taken a direct hit with producers anxious over a looming global recession.
Trouble in the copper sector
Copper has many uses throughout industry. This makes it particularly vulnerable to economic downturns. The spot price for copper has fallen throughout the coronavirus pandemic. This is a dramatic turn, given that 2 years ago global demand was expected to rise by ~4.2% through FY19–FY20. Last week it hit a low price not seen since 2016 and global inventories are nearing a 4-year high.
This looks set to change again. Over the past week, multiple copper mines globally have either been shuttered temporarily, construction projects have halted, or output has been reduced. This is particularly the case in South America. Peru has declared a state of emergency, the Codelco mine in Chile has closed, and several world class copper projects have been temporarily shelved.
With copper manufacturers starting up again in Wuhan and across China this will lead to reduced inventories. It may also create a temporary shortfall for producers able to stay online.
Best positioned ASX 200 shares
BHP Group Ltd (ASX: BHP) is the world's 3rd largest copper producer and best placed to benefit across the copper sector. Its 57.5%-owned Escondida mine site is the world's largest and is still running, as is its Olympic Dam mine in South Australia.
Oz Minerals Limited (ASX: OZL) has all of its sites operational at the time of writing. It produces mainly copper with gold as an additional product.
Oz reported a 26% reduction in net profit before amortisation and taxes (NPAT) compared with the previous year. This was due largely to currency issues. The combination of the (then) high AUD and the rising gold price left the company wrong footed with their gold hedging strategy.
The falling Australian dollar will increase the company's bottom line this year. I also fully expect its new mine Carrapateena to make a significant difference during 2020.
At the time of writing the Oz Minerals share price is down by 39.8% since the start of the year and is selling at a price-to-earnings ratio of 12.5.
Foolish takeaway
Copper is likely to be stuck in a tug of war between the recovering Chinese economy and those nations just entering the coronavirus slowdowns. The most likely projection is one of reduced inventories creating shortfall opportunities for companies able to keep operations running.
Copper companies on the ASX are currently selling at reduced share prices, making them look very attractive to the long term investor.
