Credit Suisse analysts believe copper prices may be about to spike higher, advising clients to "look through the US recession" and buy producers such as Kazakhmys.
Despite fears that a deteriorating United States economy will stem worldwide demand, benchmark copper futures hit a three-month peak of $7,788 on Friday. This strength mirrors the performance of many bulk commodities, such as iron ore and coal.
Credit Suisse said in a research note that prices have remained buoyant because of ongoing supply shortages in the industry, and limited stockpiles held by consumers who appear to be "operating hand to mouth".
"We have visited over 100 investors in the last four weeks and their biggest surprise appears to be the ongoing strength in commodity prices amidst the doom and gloom in the equity markets," analyst Jeremy Gray wrote.
"Are the commodity markets telegraphing a completely different story on global growth that has yet to be reconciled by the equity markets? We think so, and believe commodity markets are a better indicator of global growth than equity markets. This is especially true for the bulk commodities that are not influenced by speculators."
Given the tightness of supply, copper could be ready to spike higher, Credit Suisse argued. Its team believes that Chinese demand has remained strong while at the same time American and European consumers have destocked warehouses. This is pertinent at the moment because the restocking season is four weeks old, with buyers about to return from the Chinese New Year.
"The last global synchronised restocking cycle from the US, Europe and China occurred between October 2005 and March 2006. During this period copper prices almost doubled," Credit Suisse told clients. "Is this likely again today? Well, one thing is for certain, the markets are certainly not positioned for a rally."
Gray argues that because of macro-economic concerns, investors have continued to build short positions in the copper market. Yet if the price can remain strong through the current US recession, there will be a dramatic shift higher when growth re-accelerates.
He saw copper prices reaching as high as $12,000 a tonne.
Credit Suisse therefore advised investors look through the US recession into 2009, when global copper demand may re-accelerate to 5%-6% compared with supply growth of only 3.3%.
If copper does rerate to $12,000 a tonne then Antofagasta and Kazakhmys could be trading net of cash and investments at less than four and three times earnings earnings respectively in 2009, Gray argued.
"Time will tell when the market begins to consider this potential price spike, but the longer prices stay firm in this current slowdown the higher the spike could be," he concluded.
With production already slipping, "this is hardly the environment for significant copper price weakness unless we see a major economic recession. If this turns out to be true, then we believe our copper shares are trading at the wrong price and deserve a significant re-rating."
Credit Suisse repeated an "outperform" rating on Kazakhmys, up 3.4% to £12.89, and kept a "neutral" stance on Antofagasta, ahead 3.3% to 746p.
