Despite weaknesses in US demand for copper, the metal has been trading at its highest level in the past four months paving the path to opportunity for the iPath Dow Jones Copper Index (JJC), the PowerShares DB Base Metals (DBB) and the iShares MSCI Chile Index (ECH).
The US, which is the world’s second largest consumer of copper, is expected to witness weaknesses in demand for copper as the nation’s housing sector continues to take a beating. In July of this year, sales of existing homes dropped by 27.2% followed by a drop of 12.4% in sales of new homes. These trends are significant because building and construction account for nearly 50% of copper usage in the US.
Although demand in the US is expected to decline, continuing high levels of demand in China are expected to more than supersede the shortfall in demand expected in the US, providing positive price support to the industrial metal. In fact, according to the Shanghai Futures Exchange, stockpiles of copper dropped to their lowest levels in six months and imports rose to their highest levels in the past four months, both indicators that demand is exceptionally healthy in the emerging market. Furthermore, China’s economy is expected to continue to see stellar growth which will enable the nation to sustain its appetite for copper, which is a major component in making wires and pipes for construction and manufacturing.
Another indicator that global demand for copper is on the rise is the decline of copper inventories recorded by the London Metals Exchange. In fact, inventories have decreased by nearly 20% this year and metals and mining giant BHP Billiton (BHP) recently took a positive view on the metal as customers restock supplies pushing premiums up.
Lastly, news and trend in Japan signal bullish trends in copper. Despite witnessing poor GDP growth in the second quarter of this year, Japan saw increases in copper wire and cable shipments for the seventh-month in a row.
As mentioned earlier, some ways to play copper include:
- iPath Dow Jones Copper Index (JJC), which is a senior, unsubordinated, unsecured debt security which is designed to provide investors with a cost-effective exposure to copper.
- PowerShares DB Base Metals (DBB), which holds futures contracts in copper, aluminum and zinc, allocating a 33% weighting to each commodity.
- iShares MSCI Chile Index (ECH), which offers single country exposure to the a country which accounts nearly one-third of copper’s global production.
When investing in these equities it is equally important to consider the inherent risks that are involved. To help protect against these risks the use of an exit strategy which identifies specific price points at which downward price pressure is likely to be seen is important. Such a strategy can be found at www.SmartStops.net.
Disclosure: Long ECH