Source: McAlinden Research for Streetwise Reports 07/23/2020
McAlinden Research examines the investment opportunity afforded by copper in the evolving pandemic and post-pandemic economy.
The coronavirus has disrupted copper mines and delayed new builds, throttling current and future supply. Meanwhile, demand is bouncing back as the world’s biggest consumers of copper reboot their economies. Stimulus packages being unleashed across the world also promise to transform the long-term outlook, particularly with spending on copper-intensive green energy infrastructure.
Related Exchange-Traded Funds (ETFs): iPath Series B Bloomberg Copper Subindex Total Return ETN (JJC); Global X Copper Miners ETF (COPX)
Copper has been on a roll in recent months. Today, the commodity is trading at a price of $2.87 per pound in the spot market, marking a 36% increase from March 22, when copper’s price plunged to a five-year low of $2.10 due to a collapse in demand. In the securities market, the copper ETF (JJC) has gained 39% since stocks bottomed on March 23, while the copper miners ETF (COPX) has actually doubled.
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Following these impressive gains, we are right back to where we were at the start of the year. Copper’s spot price is just 2% higher than on January 1, 2020, while JJC is up 3% and COPX is down 3%. In comparison, the S&P 500 is flat year-to-date. When looking at performance over a two-year horizon, the copper ETFs still lag the broad market. Over the past two years, JJC returned has +4%, COPX has returned -15%, while SPY returned +15%.
The big question now is whether further outperformance is possible after copper’s recent gains. The answer is yes, based on three factors.
I. Post-Pandemic Recovery of the Global Economy
Industrial production is on the rise globally, as businesses resume their operations. [The July 15] data release from the Fed showed that U.S. industrial output surged 5.4% in June, the most since December 1959, beating market expectations. Factory production jumped 7.2%, and even more so in the beleaguered auto industry, where production of cars and auto parts surged 105%. Though U.S. capacity utilization increased 3.5 percentage points to 68.6% in June, that rate is below its long-run (1972–2019) average 80.1% and below January’s level of 76.9%, so there’s plenty of room for production expansion. The June ISM Manufacturing PMI index also suggests that factory output will rebound further.
A similar comeback in industrial production is taking place in China, and in the European Union. China’s industrial production rose by 4.8% from a year earlier in June 2020, marking the third back-to-back month of expansion and the largest increase in six months, as factory activity picked up.
This is all positive for copper demand, as those three markets—China, the EU and the U.S.—account for 80% of the world’s annual copper consumption.
II. Global Transition to Low Carbon Economy
From a longer-term perspective, copper stands to be a big beneficiary as the world transitions to a low-carbon economy. That’s because renewable systems use about five times more copper than conventional energy systems. Electric vehicles (EVs) also require 2-4 times more copper than internal combustion engine vehicles. EV sales and the switch to renewables are only set to grow as many countries, especially in Europe, place the green recovery at the center of their stimulus packages.
Accordingly, copper should experience huge demand in coming years given its potentially expanding role in a green economy. The metal is considered a critical component in practically all green tech, from electric vehicles to wind- and solar-power technology.
III. The Supply Picture
On the supply side, analysts are projecting shortages in the future due to a dearth of investments in new mines. More recently, the pandemic’s rapid spread across Latin America and worker strikes have led to supply disruptions in key producing nations like Chile. That’s likely to result in lower production this year.
With output from some mines limited and demand picking back up, global copper stockpiles have been dropping since March. Inventories of copper in warehouses monitored by the Shanghai Futures Exchange stood at 137,336 tonnes on Friday, which is 64% lower than the peak of 380,000 tonnes reached around March 13. In LME-registered warehouses, copper inventories have fallen to 197,850 tonnes, down about 28% since March 13.
The Bottom Line
As an industrial metal with a wide variety of applications—from manufacturing to electronics and construction—copper is considered a cyclical commodity whose price fluctuates in tandem with economic cycles, rising when the economy grows and falling when the economy slows. As the world’s biggest economies go into recovery mode, and given its potentially expanding role in an increasingly green global economy, copper’s medium-term and long-term outlook appears increasingly positive.
As such, investing in copper now can perform triple duty in an investor’s portfolio. It can serve as a bet on the 2020/2021 global economic recovery, a play on the secular shift from fossil fuels to renewables and a potential hedge for inflation, since copper typically rises when inflation is accelerating.
How to Gain Exposure
Investors can gain exposure to copper’s rise through ETFs that track the metal’s price in the futures market or by investing in copper producers, since the latter stand to benefit from higher prices.
The Global X Copper Miners ETF (COPX) invests in a diversified basket of about 30 copper miners. Meanwhile, the iPath Series B Bloomberg Copper Subindex Total Return ETN (JJC) and the United States Copper Index Fund (CPER) offer exposure to fluctuations in the price of the physical commodity by investing in copper futures contracts. While JJC is structured as an exchange-traded note, CPER is structured as a commodity pool.
McAlinden Research Partners (MRP) provides independent investment strategy research to investors worldwide. The firm’s mission is to identify alpha-generating investment themes early in their unfolding and bring them to its clients’ attention. MRP’s research process reflects founder Joe McAlinden’s 50 years of experience on Wall Street. The methodologies he developed as chief investment officer of Morgan Stanley Investment Management, where he oversaw more than $400 billion in assets, provide the foundation for the strategy research MRP now brings to hedge funds, pension funds, sovereign wealth funds and other asset managers around the globe.
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