Time to Buy Dr. Copper? 3 Plays for a Red-Metal Rebound

by Aaron Levitt | March 14, 2014 5:44 am

It hasn’t been exactly a rosy start to the year for industrial metal copper. Copper prices have plunged of late thanks to various pieces of poor data, and overall, cooper has managed to be the worst-performing base metal so far in 2014. As others like nickel, aluminum and tin have flourished, Dr. Copper has only be able to post a nearly 13% loss.

jjc cu cper[1]That has some analysts wondering if Dr. Copper’s[2] degree is really worth anything.

It also brings up the question whether the time could be right for investors to strike and load up on the now cheap base metal as copper price plumb the depths.

Copper Prices: First the Bad News

Earlier this week, copper prices experienced their biggest two-session drop in more than 28 months. That builds on the red metal’s poor performance since the start of the year. Copper futures can now be had for less than $3 a pound — something that hasn’t happened since July 2010.

The reason: negative news stemming from the key demand driver of the metal, China.

Chinese economic growth seems to be slowing as exports from the BRIC economy have recently stalled. This past February, Chinese exports plunged by the greatest amount since 2009 amid the global credit crisis.

As such, demand for copper imports has recently turned bearish. According to customs data reported by Bloomberg[3], China imported a total of 380,000 metric tons of unwrought copper and copper products in February, which was a huge about-face after January, when the country imported a record 536,480 tons.

Meanwhile, Beijing’s stores of the metal continue to rise amid lower Chinese import demand. Copper stockpiles have now posted their longest advancement in two years and have continued to pile on supplies for eight consecutive weeks.

Another problem for copper in China has nothing to do with using copper for its intended purpose but as debt collateral. Analysts predict[4] that something like 60% of all the copper in China’s storage warehouses has been used as collateral for various public and private debt obligations.

Two Chinese solar companies — Baobian Electric and Chaori Solar — have effectively defaulted on their obligations. Chaori marked the first time a Chinese company has defaulted on its onshore corporate bonds. The norm had been for Beijing to step in and bail out firms. Investors are now worried that any real credit crisis in China could cause a mass liquidation of copper stores and depress prices.

All in all, it’s easy to see why copper prices have touched at 44-month lows.

Still, Not All Is Bad for Dr. Copper

It’s also easy to see why there could be value for metal at current prices. Oddly enough, China also is the main driver for optimism in copper prices.

Supplies for copper remain relatively tight despite rising stockpiles in warehouses. Those supplies should remain that way as mining costs[5] continue to rise. Investment bank Barclays (BCS[6]) estimates that producing copper is now more than 87% more expensive to produce today than it was back in 2007. Those higher labor and energy costs will keep a tight lid on future supplies as producers limit production to save money.

At the same time, China still is consuming tons of copper and will do so for the foreseeable future. Despite February’s drop in import demand, China’s thirst for copper is already 41% higher this year than last. Then there is the fact that Beijing has pledged to increase electrical grid infrastructure spending by 13% this year[7]. Wiring up all of China’s households will take an awful lot of the red metal.

All of this could put plenty of pressure on the world’s tight supplies. And given that copper now sits at lows not seen in years, investors looking for a contrarian play might want to snag some exposure to copper. Here are three ways to do that:

iPath DJ-UBS Copper ETN (JJC)

With more than $80 million in assets and swift trading volume, iPath DJ-UBS Copper ETN (JJC[8]) could be the easiest way for investors to get their hands on the red metal. The fund is an exchange-traded note (ETN) backed by Barclays that tracks near-dated high grade copper futures contracts traded on the Comex. So far, the fund has fallen right along with the downturn in copper prices and currently sits at five-year lows.

With expenses of 0.75%, or $75 per $10,000 invested, JJC isn’t cheap … but it is a heckuva lot cheaper than opening a futures account!

United States Copper Index Fund (CPER)

One of the main sticking points with JJC — and other ETNs, for that matter — is that in addition to the investment risk, you tack on counterparty risk of the issuing firm. See, ETNs are technically bonds that promise to track an index[9].

For those investors wanting own the physical futures contract, United States Copper Index Fund (CPER[10]) is the only way to do it in ETF form. CPER uses a unique quantitative formula to select which futures contracts to buy. The fund is rebalanced monthly and has dropped by less than copper prices. Expenses run 0.65%, and investors will receive a K-1 statement come tax time.

First Trust ISE Global Copper Index (CU)

Betting on the producers of the red metal could be an equally as compelling play. As it stands to reason, rising copper prices will boost profits for those firms that dig it out of the ground.

The First Trust ISE Global Copper Index Fund (CU[11]) spreads its $30 million in assets around 24 different copper miners, the bulk of which are located in the Anglo nations of Canada, Australia, the United States and the U.K. That includes names such as Antofagasta (ANFGY[12]), Southern Copper (SCCO[13]) and Rio Tinto (RIO[14]). That offers some stability, as copper could be a rocky ride in the next few months.

Expenses for CU run 0.7%.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

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  1. [Image]: https://investorplace.com/wp-content/uploads/2012/08/CopperPromo.jpg
  2. Dr. Copper’s: https://investorplace.com/2013/04/dr-copper-catches-the-flu/
  3. reported by Bloomberg: http://www.bloomberg.com/news/2014-03-10/copper-tumbles-to-8-month-low-in-london-on-china-demand.html
  4. Analysts predict: http://blogs.marketwatch.com/thetell/2014/03/12/chinas-role-in-coppers-collapse-why-investors-should-care/
  5. mining costs: http://blogs.wsj.com/moneybeat/2014/03/12/copper-prices-seen-rebounding-on-tight-supply/
  6. BCS: http://studio-5.financialcontent.com/investplace/quote?Symbol=BCS
  7. increase electrical grid infrastructure spending by 13% this year: http://www.bnamericas.com/news/metals/chinese-metals-demand-growth-to-remain-strong-in-2014-barclays
  8. JJC: http://studio-5.financialcontent.com/investplace/quote?Symbol=JJC
  9. ETNs are technically bonds that promise to track an index: https://investorplace.com/2012/06/the-troubling-evolution-of-exchange-traded-products/
  10. CPER: http://studio-5.financialcontent.com/investplace/quote?Symbol=CPER
  11. CU: http://studio-5.financialcontent.com/investplace/quote?Symbol=CU
  12. ANFGY: http://studio-5.financialcontent.com/investplace/quote?Symbol=ANFGY
  13. SCCO: http://studio-5.financialcontent.com/investplace/quote?Symbol=SCCO
  14. RIO: http://studio-5.financialcontent.com/investplace/quote?Symbol=RIO
  15. ETF Insights e-letter: https://order.investorplace.com/?sid=FQ8126

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