Supply Issues, Hoarding Report Send Copper ETFs Soaring

by on December 22, 2010 | ETFs Mentioned:

With the finish line in sight, 2010 has been a very interesting year for commodity investors; a number of products hit multi-year or all time record highs thanks to a weaker dollar, strong emerging market and supply issues across much of the globe. Most of the supply issues that have impacted commodity markets have been beyond human control, such as inclement weather destroying crops or natural disasters impacting productivity in commodity producing regions. However, as we have seen in recent weeks, supply issues can also be a direct result of human activity, and can often have just as big of an impact on commodity prices as ‘Acts of God’. This was recently seen in the price of cocoa, as an electoral crisis continues to play out in the Ivory Coast, one of the biggest producers of the crop. A similar situation–although not nearly as politically-driven–is taking place in one of the world’s top producers of copper, threatening to push the red metal even further above its all-time high levels.

Chile, the world’s largest copper miner accounting for roughly one-third of global supply, has had its fill of drama in 2010, including a a severe earthquake that rocked the country earlier in the year. Despite this devastating event Chile has managed to surge ahead, as the country’s equity markets quickly regained their losses and the Chilean economy boomed thanks in part to massive copper deposits and strong relationships with resource-hungry China. Yet a number of issues have been plaguing the Collahuasi mine–the world’s third biggest–threatening to further tighten supplies and choke off an industrial metal-led recovery in the Andean nation.

A recent incident at the Punta Patache port facility, where the copper concentrate is shipped out to be processed into a more usable form, is being felt around the globe. A shiploader at the facility collapsed reportedly killing three workers and causing a great deal of damage to the facility. As a result, the miner has invoked ‘force majeure’ on all its contracts, suspending shipments from the facility indefinitely. In fact, some believe that it could take at least a month to repair the station, potentially stalling the delivery of any copper supplies already at the port facility and significantly curtailing flow out of the mine, which is responsible for more than a half a million tons of copper production a year [also read A Closer Look At Copper ETF Options].

This event comes right on the heels of the end of a strike by the mine’s union, in which workers accepted a bonus of about $25,000 and a 3.25% wage increase in order to come back to work. The deal looked likely to help boost the output of the mine and limit the volatility of the mine’s production going forward, but the recent incident at Punta Patache definitely threw a wrench in these plans to get things back to normal. “How significant the effect will be… remains to be seen…(but) it certainly has boosted sentiment, reminding the market of the steady drip-feed of problems…over the past few years, impacting production,” said Standard Bank in a note.

The news of this event sent prices of copper close to the $4.30/lb. mark, a level unfathomable just a short time ago for the crucial metal. “Given the fresh highs in copper and the approach of year-end it does look as though the metals are on course to close on a strong note,” William Adams, analyst at FastMarkets, said on Tuesday. “Needless to say the risk lies to the downside, but given supply disruption in copper in Chile, the overall trends in the metals and some potential support for the euro from China, the path of least resistance remains to the upside and is likely to stay that way unless something emerges to knock confidence.”

Separately, a recent report indicates that a single trader now holds between 80% and 90% of all copper sitting in London Metal Exchange warehouses. That translates into about half of global exchange-registered copper, with a valuation of close to $3 billion. “While commodities exchanges scrutinize all holdings to ensure a single player isn’t trying to corner the market, and many of the positions are owned by big firms on behalf of clients, the large holdings do result in a concentration of ownership that could skew prices,” writes Tatyana Shumsky.

Below we highlight three ETPs that have been especially impacted by the news [see all copper ETFs]:

iPath DJ-UBS Copper ETN (JJC)

As the main ETN tracking the price of copper, JJC has the most to gain or lose from any supply disruptions in the important base metal. The fund tracks the Dow Jones-UBS Copper Subindex Total Return, which is a benchmark that relates to a single commodity, copper (currently the Copper High Grade futures contract traded on the COMEX). Currently, the copper futures market is slightly backwardated, suggesting that investors may have tailwinds at their backs going forward. So far in 2010, the fund has gained about 25%, but is up close to 45% over just the past 26 weeks [also read Five ETFs Heavily Dependent On China].

Global X Copper Miners ETF (COPX)

For investors weary of the futures-based strategy but still looking to make a play on copper, COPX presents a compelling choice. The fund tracks the Solactive Global Copper Miners Index, a benchmark designed to reflect the performance of the copper mining industry. It is comprised of common stocks, ADRs and GDRs of selected companies globally that are actively engaged in some aspect of the copper mining industry such as copper mining, refining or exploration. The fund currently consists of 30 securities from across the globe with a heavy focus on the English-speaking world; companies in Canada, the UK, Australia, and the U.S. comprise close to 60% of the fund’s total assets. Since its inception in mid-April, the fund has posted a return of about 30%, and has gained nearly 60% over the past half year [also see Precious Metal ETFs: Physical vs. Equity Exposure].

iShares MSCI Chile Index Fund (ECH)

While the news may have boosted the ETPs most directly impacted by copper prices, it wasn’t exactly a welcome development for the main ETF tracking the Chilean equity markets; ECH tumbled by nearly 1% on Tuesday. Since one of Chile’s most important exports is copper–and due to the role that the country plays in worldwide production–any changes in supply outlooks can have an adverse impact on both the Chilean peso and Chile’s equity markets. While a weaker currency does make the country’s exports cheaper, it also makes goods more expensive to import, an important factor for a country such as Chile that imports the vast majority of its energy sources.

ECH is well diversified for an emerging market fund, offering investors exposure to 35 companies while charging investors a 65 basis point expense ratio. Its top sector weightings go towards utilities (23%), industrials (20%), and materials (20%). The fund has managed to amass just over $1 billion while posting trading volumes of just over a quarter million shares every day. Despite this short-term set back, investors are likely to have been very happy with the performance of ECH; the fund has gained 45% about so far in 2010 [see Chile, The Forgotten South American ETF].

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Disclosure: picture courtesy of Daniel Schwen.