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Any Hope For Copper ETFs?

March 12th, 2014

copperThe commodity ETF space had seen some all-stars to start the year thanks mainly to soft stock markets and the excessive under valuation in the natural resource world. Some metals like gold and silver surged on their safe haven investment status, while some soft commodity ETFs (like cocoa) have added double digits on a supply crunch.

However, significant weakness has been seen in the industrial metals space (such as with copper) in the year-to-date frame. All three exchange traded pure plays on copper haven’t seen gains so far this year. Notably, copper exchange traded products lost around 16% last year.

Behind the Slump

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The prime reason for this severe slump may be the manufacturing slowdown in the world’s second largest economy, China. The country is the biggest consumer of copper (and other industrial metals) in the world and thus easily regulates the price movement of these industrial metals.

As per Bloomberg, a gauge for activity in China’s manufacturing sector fell to a six-month low in January as export orders and output remained sluggish. Prior to this, China’s official nonmanufacturing Purchasing Managers’ Index dipped to 54.6 in December from 56.0 in November (read: China ETFs Struggle on Weak Data, Bailout Speculation).

The slowdown came in the wake of the government’s effort to tighten up the $6 trillion shadow-banking system and a rise in interbank borrowing costs. Monetary tightening signals decelerating growth in industrial sector, which in turn, cripples the demand for copper.

The data has been lackluster in the other end of the world – the U.S. – as well.  Cold weather has frozen the factory output in the U.S. causing the January readings to plunge to the lowest in more than 4-1/2 years. Notably, U.S. is the second largest global copper user at about 10% trailing China (a nation that uses about 40% of global copper).

A demand-supply imbalance is also there to hurt the prices of copper. The Citigroup analyst expects the copper market to see oversupply at least through 2015 and 2016. Thanks to all these issues, iPath DJ-UBS Copper TR Sub Index ETN (NYSEARCA:JJC), iPath Pure Beta Copper ETN (NYSEARCA:CUPM) and United States Copper Index Fund (NYSEARCA:CPER) are under pressure, underlining the downward trend in the copper market.

Any Hope for Turnaround?

While some analysts remain cautiously optimistic on the journey of the red metal in 2014, some anticipate that the prices of copper will take a middle-of-the-road approach and some are downright bearish on the commodity.

As per the International Business Times, copper will likely rebound in 2014 on the strength in the U.S. construction and utility sector. Apart from that, higher use of copper will also be seen in the production of smartphones and the recovering housing industry in the U.S.

While China is presently grappling with slowing growth, the nation’s utility sector is going to see huge investment. As per Barclays, the State Grid Corporation of China (SGCC), which fulfils about 80% of power requirement in China, aims to enhance its annual investment by 13% to more than $60 billion.

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NYSE:CUPM, NYSE:JJC


 

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