The 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 (read:
Invest in Cocoa with These Top Ranked ETFs
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
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
, 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
to 54.6 in December from 56.0 in November (read:
China ETFs Struggle on Weak Data, Bailout
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
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 (
iPath Pure Beta Copper ETN
United States Copper Index Fund
) have lost about 4.25%, 3.87% and 5.20% YTD respectively,
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.
Provided Chinese utilities comprises more than
of Chinese total copper consumption, SSGC's massive lift in capital
investment will well explain the potential spike in copper prices
The space might see near-term supply crunch, but definitely not
long-term, thanks to a recent strike in copper processing facility
in Chile which has one of the largest capacities in the world,
temporary closure in a Philippines facility ravaged by the super
storm Haiyan, planned maintenance in BHP Billiton facility in
Australia, a ban on copper concentration export in Indonesia and
lower production in China (read:
Two Country ETFs to Buy on Metal Strength
However, some analysts expect the red metal to remain
in 2014. Analysts from the likes of BofA Merrill Lynch and INTL
FCStone have a neutral view on this industrial metal on growing
supplies and moderate demand. Though UBS AG increased its near-term
copper price estimate, it believes copper prices this year will
remain lower year over year.
In a nutshell, even if copper recoils in 2014 on some short-term
positive blips, the long-term trend is surely sluggish due to
unfavorable demand-supply scenario. The relative strength Index for
the largest copper ETN, JJC, is presently 42.5 indicating that the
product is neither in the oversold nor in the overbought territory.
Its short-term moving average is below the long-term average. This
suggests bearishness for this ETN (read:
More Pain in Copper ETFs?
If the U.S. economy comes up with sound manufacturing and other
data in the coming months, which is in fact most likely, the Fed
will likely speed up the QE tapering then. This will build worries
over continued dollar strength and may mar commodity investing.
In the post-taper world, key emerging markets will also fail to
grow at robust rates. Thanks to these factors, we have a Zacks ETF
Rank #5 (Strong Sell) for all three exchange traded products that
focus on copper, and we are looking for more losses in the space in
the months to come as well.
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US-COPPER IF (CPER): ETF Research Reports
IPATH-PB COPPER (CUPM): ETF Research Reports
IPATH-DJ-A COPR (JJC): ETF Research Reports
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