Copper ETFs Are Soaring: Can It Last?

by on August 14, 2009 | Updated August 28, 2009 | ETFs Mentioned:

Copper, one of the world’s most versatile metals, saw prices crash in late 2008 and early 2009 amidst the prolonged housing slump and decreased demand from China and other emerging markets. However, prices have come roaring back and are now up over 100% from its lows and within striking distance of the $3 per pound mark. After such an incredible run-up, the million dollar question on every prudent investor’s mind is: can it last? While no one knows for sure (and speculators can certainly muddy the waters in the short term), there is a strong case to be made for copper prices continuing to surge, given the metal’s role in everything from wiring to cookware to ammunition.

Weak Dollar & Peak Copper

A weak USD has led to soaring copper pricesA large portion of the strength of copper prices can be attributed to the weak U.S. dollar. Like most commodities, copper is traded around the world in dollars, so prices can be very dependent on the greenback’s strength. Due to inflation fears in the United States, metals such as gold and silver have seen a spike upwards and, copper has also followed that trend to an extent. Investors anticipating continued weakness in the U.S. dollar may find copper ETFs to be an interesting play on this anticipated depreciation. Unlike gold and silver ETFs, however, copper funds offer exposure to a material that is used in a wide range of industrial applications, providing other opportunities for price increases.

Another reason for continued price appreciation in copper could be what is being referred to as “Peak Copper.” If we reach a point where the rest of the world uses as much copper as North Americans do, the world supply could face a serious deficit. According to Scientificamerican.com, North Americans use 170 kilograms of copper per person. If you then “multiply that by overall population estimates of 10 billion people by 2100 and the world will require 1.7 billion metric tons of copper by that date–more than even the most generous estimate of available resources.” Obviously such extreme levels of demand are unlikely and far down the road, but should such a scenario play out (or even if fears of such a scenario become widespread), it could certainly continue to push copper prices (and copper ETFs) skyward.

Reliance on Housing, Easily Recyclable

A major risk of any investment in copper is its reliance on housing products such as wiring and cookware. The housing slump let to a severe slowdown in the production of new homes, which in turn precipitated a crash in copper prices. Simultaneous decreased demand from China certainly didn’t help the situation either, as investors saw prices slump to under $1.50 per pound. As such, if copper prices are to continue on their upward path, they’ll need the support of a healthy and recovering housing market to do so.

Meanwhile, copper is also one of the most recycled metals on Earth. Copper.org estimates that “each year in the U.S.A., nearly as much copper is recovered from recycled material as is derived from newly mined ore.” High levels of recycling likely keeps copper prices lower than if the recycling rate was more in line with other industrial metals.

Surging Demand from China

China has returned to its old ways, sucking up copper from any available source in order to satisfy its thirst for raw materials. China’s stimulus program has been a main driver of copper demand as of late, since many of the stimulus projects are related to construction and other copper-intensive sectors. Also, China is becoming increasingly concerned with its U.S. dollar holdings and the safety of their T-bill investments. As such, the Chinese have begun to shift some of their Treasury investments into raw materials holdings. There has even been some speculation that the Chinese will adopt a copper standard due to its love of the metal and displeasure with United States economic policy.

ETF Plays On Copper

iPath DJ-AIG Copper Total Return Sub-IndexSM ETN (JJC): JJC, which seeks to provide a return equivalent to a basket of copper futures, is the purest exchange-traded play on copper available. The ETN, which has an expense ratio of 0.75%, is up about 104% so far in 2009.

JJC

Investors looking for copper exposure as part of a more diversified commodity investment may want consider ELEMENTS RJZ, iPath JJM, or E-TRACS UBM, all three of which have significant copper allocations but contain a wide range of other industrial metals as well (RJZ has 14% in gold, JJM has 18% in aluminum, and UBM has almost 33% in aluminum).

For those looking for indirect exposure to copper through equities, the iShares MSCI Chile Index Fund (ECH) offers an interesting play. ECH tracks the market in Chile where over one third of the world’s copper is produced. This fund is (not surprisingly) weighted heavily towards energy, mining, and utilities, but it also allocated over 30% of the portfolio to consumer product and service stocks, which could benefit if copper wealth increases consumption.

Disclosure: No positions at time of writing.