The price of copper has witnessed positive support over the last few months and imbalances in supply and demand of the base metal are expected to provide further support to prices in the near future, enabling the iPath Dow Jones Copper Index ETN (JJC), the PowerShares DB Base Metals (DBB), the iShares MSCI Chile Index (ECH) and the iShares MSCI Australia Index (EWA) to reap the benefits.
According to forecasts by analysts surveyed by Bloomberg, demand for copper is expected to outpace supply by 367,500 metric tons in the coming year. This demand is primarily being driven by economic growth around the globe. China, the world’s largest consumer of copper is expected to continue to witness economic expansion in the coming years as is India, Brazil and other emerging markets. In fact, according to a study conducted by Barclays Capital, copper consumption in China, India, Brazil and the Middle East is expected to increase at an average annual rate of 7% per capita through 2015.
Although demand continues to increase for copper, the true price support is coming from supply concerns and shocks. Global exchange inventories of copper have declined by 22% this year and stockpiles are expected to drop to an all time low. Furthermore, mining and production of copper has been on the decline as new reserves are getting harder to find and the grade of copper that is being extracted continues to deteriorate. In fact, production at the world’s largest copper mine, Escondida, is expected to drop by as much as 10 percent over the next year. Production concerns can further be supported by statements made by Freeport McMoRan (FCX) stating that major copper reserves that are produced are being extracted from mines that are 100 years old and fading away.
In a nutshell, copper is expected to witness a supply and demand imbalance in the coming years and one could capitalize on this shortcoming through the previously mentioned ETFs.
- iPath Dow Jones Copper Index ETN (JJC), which is a pure play on copper and seeks to track the performance of copper futures contracts
- PowerShares DB Base Metals (DBB), which allocates 33% of its assets to copper futures contracts
- iShares MSCI Chile Index (ECH), which is a play on Chile, the world’s largest copper producer accounting for nearly one third of global copper output.
- iShares MSCI Australia Index (EWA), which boasts BHP Billiton (BHP) as its top holding, allocating more than 15% of its assets to the diversified natural resources company who is the largest shareholder in the world’s largest copper mine.
Disclosure: No Positions