After a weak 2013, most of the commodities have seen a decent performance so far this year. Commodities ranging from US Coffee C, Natural Gas to Nickel, Gold and Palladium have easily crushed the broader markets so far this year.
In contrast, the industrial metal, Copper, has been quite volatile this year and has also booked losses in the year-to-date frame. Growth concerns in the world’s second largest economy since the start of the year takes most of the blame for slumping copper demand.
China In Focus
The outlook for copper primarily depends on China, which is the biggest consumer of the metal in the world. In fact, China accounts for a sizable 40% of the global copper consumption and any change in demand causes huge fluctuations in copper prices.
China has been facing multiple problems from the start of this year (read: Copper ETFs Tumble on China Growth Concerns).
China’s GDP grew at a weaker 7.4% during the first quarter of 2014, as against the 7.7% growth during the last quarter of 2013. Moreover, most of the economists have revised their GDP growth forecast for 2014 downwards.
Things have been worsening in the wake of a growing number of defaults. The debacle started after Shanghai Chaori Energy Science & Technology Co., a solar equipment maker, became the first onshore bond issuer to default in Chinese history.
The country’s slumping manufacturing sector has made matters worse. Though the recent preliminary figure for the Purchasing Manager Index stood at 49.7 in May as compared to 48.1 in April, the index is still below 50 suggesting that the manufacturing sector is still contracting (read: China ETFs Slump on Terrible Export Numbers).
Also, the country’s crumbling housing market is a cause of legitimate concern. New construction starts in the property sector during the January-April period have dropped 24.5% year over year (as measured by area), according to a Wall Street Journal report. Moreover, the growth in average new housing prices is also declining.
The slowdown is largely due to a series of measures taken by the Chinese government to curb the surge in property prices. It has also tightened the country’s huge shadow banking system in order to cool skyrocketing property prices (read: Will the China Stimulus Boost Copper ETFs This Quarter?).
Copper ETFs
With weakening demand from the top consumer of copper, all the three copper ETFs have been trading in the red since the start of the year.
Though some of the recent reform measures by the Chinese government enabled the metal and in turn the ETFs to recover part of their losses, the short to medium term outlook for the metal remains weak.
With dwindling growth numbers and a slumping housing market, the demand for copper is expected to remain weak, keeping prices depressed in the near term. Moreover, it is too early to conclude that the measures taken by the government will bring about a sustained growth in the economy (see all the Industrial Metal ETFs here).
Thus, the copper ETFs might again start facing weakness and could also give up the gains recorded in the past month. This is especially true given that we have a Zacks Rank #5 or Strong Sell rating on the below mentioned copper ETFs. Investors should clearly avoid these ETFs and not fall prey to the current surge in their prices.
iPath DJ-UBS Copper Subindex TR (NYSE:JJC)
This product offers investors exposure to front month copper futures tracking the Dow Jones UBS Copper Subindex Total Return Index. The fund manages an asset base of $81.1million and is the most popular among the trio of copper ETFs.
The product has a daily average trading volume of 70,511 shares and charges 75 basis points as expenses. The fund is down 6.8% from the start of 2014.
United States Copper Index Fund (NYSE:CPER)
The fund manages a small asset base of $4.2 milion and charges 65 basis points as fees.
CPER tracks the price movements of the SummerHaven Copper Index Total Return. The index tracks the returns from a portfolio of copper futures contracts fully collateralized with 3-month U.S. Treasury Bills.
The fund has lost 6.8% in the year-to-date frame, though it has gained some 2% in the past one month.
iPath PureBeta Copper ETN (CUPM)
The fund tracks the Barclays Capital Copper Pure Beta TR Index, giving exposure to unleveraged investment in copper futures contract. However, it follows a slightly different strategy.
The Index may roll into one of a number of futures contracts with varying expiration dates, as selected using the Barclays Capital Pure Beta Series 2 Methodology.
The fund seems to be the least popular with an asset base of $1.2 million and 75 basis points as fees. Like JJC and CPER, the fund has also shed more than 6% so far this year.