Copper prices fell off a cliff on Wednesday, sending the metals sector into a tailspin. Prices for the red metal – which is used across a gamut of industries – tumbled to its lowest level in more than five years, putting metals and mining stocks on thin ice.

Growth Fears Lead to Downward Spiral

Prices of copper for March delivery slid roughly 5% to $2.51 per pound on the New York Mercantile Exchange on Wednesday, the lowest since Jul 2009. Copper prices also fell around 5% on the London Metal Exchange (LME) to a five-and-a-half-year low of $5,571.50 per ton, according to Reuters.   

Falling copper prices also pulled down the share prices of metals and mining stocks. Freeport-McMoRan (FCX - Analyst Report), BHP Billiton (BHP - Analyst Report) and Southern Copper (SCCO - Snapshot Report) were among the stocks that saw their stocks prices head south along with copper prices.

Mining majors Freeport and BHP Billiton tumbled as much as 15% and 5.5%, respectively, on Wednesday. Southern Copper’s shares slipped 11% while Rio Tinto (RIO - Analyst Report) lost 4% on that day.  Moreover, shares of Glencore – one of the world’s top copper producers – tanked as much as 12%.  

Fears of a slowdown in global economy wreaked havoc on copper prices and triggered the selloff in the mining space. Many investors are seeing the copper slump along with the persistent decline in oil prices as indicators of a possible economic slowdown in 2015.

The World Bank, on Tuesday, trimmed its global growth forecast for 2015 to 3% from 3.4% expected earlier. The bank, in its report, cited ongoing sluggishness in China – the world’s biggest consumer of copper –  and added that the country’s growth will slow to 7.1% in 2015 from an estimated 7.4% in 2014, further tapering to 7% next year and 6.9% in 2017. Sluggishness in the Euro zone and Japan also contributed to the bank’s downwardly revision.     

Copper prices fell during 2014 on a slowdown in China and oversupply of the metal. Prices dipped to a four-year low in end-November to $2.861 per pound on tumbling oil prices. In fact, copper fared the worst among all industrial metals last year with prices sliding around 14%. Copper prices are already down more than 8% this year.

The Threat of Supply Gut

Copper – an important barometer for the global economy – is a major industrial metal and plays a significant role especially in emerging countries. Trends in the copper market are often considered as a useful indicator of the state of the global economy given the metals diverse applications. Developments in the world economy have a strong correlation with movements in copper prices.
 

Looming oversupply in the market poses a threat on copper prices. The International Copper Study Group (“ICSG”) expects the copper market to swing into a production surplus of roughly 390,000 tons in 2015 following five straight years of deficits. This is expected to outstrip the demand levels.

The ICSG also sees significant growth in mine production globally in 2015 due to added output from expansions and new mine projects and expects worldwide mine production to rise by roughly 7% this year. Global refined copper production is forecast to go up around 4% to 23.1 million tons in 2015.

Despite seeing an oversupplied market, Rio Tinto and BHP (separately and in joint ventures) plan to mine millions of additional tons of copper. They are amassing vast copper holdings to capture a bigger chunk of the $140 billion global market in a bid to eventually squeeze out high cost producers.

China, Eurozone Hurting Copper Demand

Decelerating demand in China is weighing on copper prices. The world’s second-largest economy holds the largest share by far of global copper consumption (roughly 46%), and also has a significant share in the total production of pure copper. Trends in Chinese GDP growth and world trade have a significant influence on copper prices.

A slowdown in demand in China has been triggered by the country's tepid property market and weaker infrastructure investment growth. China’s economic growth has cast a shadow on investors' view of commodities demand and, as a result, brought down demand for metals, creating price weakness.

Moreover, the European economy is still not out of the woods as evident from the meager Eurozone GDP growth (of 0.6%) in the third quarter of 2014. Germany and France, two of the Eurozone’s largest economies escaped recession by a whisker. Weakness in Germany has signaled a slowdown in the much awaited recovery in the Eurozone economy.

Who Gains from the Slump?

While falling prices of copper is a bad omen for mining stocks, it is expected to have a positive impact on a vast spectrum of industries, in which, the metal has a widespread use. Electrical (wire and cable), building construction (pipes and wires), and consumer goods are among the industries that require a significant amount of copper as raw material for their operations, and thus, are expected to gain from the descending copper prices. Companies across these industries will see margin benefits through reduced raw material costs.

3 Stocks to Benefit

Below we list three stocks which will gain from the copper meltdown as they purchase significant volumes of the metal as input for their operations.

Belden Inc. (BDC - Snapshot Report)

Missouri-based Belden makes and markets signal transmission solutions that have broadcast, enterprise, and industrial applications. The company makes flexible, copper-clad coaxial cable for the high-speed transmission of data, sound, and video for the broadband distribution industry. Its enterprise solutions include copper cable and connectivity products.

Copper is the major raw material the company uses for its cable products. It is a key component of the cost of most of Belden’s cable products.

Belden sports a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 9%. The forward price-to-earnings ratio (P/E) for the stock is 14.95.

Houston Wire & Cable Company (HWCC - Snapshot Report)

The Texas-based company offers wire and cable products that are used in repair and replacement work, larger-scale projects and a vast range of industrial applications including communications, energy, general manufacturing, construction, infrastructure, petrochemical, transportation and utility. Copper is a component of the wire and cable it sell.

Houston Wire & Cable has a Zacks Rank #3 (Hold) and an expected earnings growth of 15%. The forward price-to-earnings ratio (P/E) for the stock is 12.07.

Lennox International, Inc. (LII - Snapshot Report)

Lennox is a major provider of climate control solutions and its products have applications across heating, ventilation, air conditioning and refrigeration markets. Copper accounts for a significant portion of its raw material purchases.

Lennox has a Zacks Rank #3 (Hold) and an expected earnings growth of around 20%. It has a P/E of 17.65x.

The copper market has been stuck in the quagmire of oversupply. In the short haul, prices will remain under pressure due to supply surplus and depressed Chinese demand, thereby benefiting certain industries (as referred above) in the form of lower input costs.