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With China Rising, Are Copper ETFs Back on Track?

Zacks Equity Research

Copper prices saw a troubled start this year on Chinese growth concern as well as slowdown in the U.S. economy. Copper prices fell almost at a double-digit rate in Q1, while touching its 52-week low price this March (read: Copper ETFs Tumble on China Growth Concerns).

Events in China regulate the price movement of this industrial metal as the country is the biggest consumer of copper in the world making up roughly 40% of the global copper demand.

Thus, a manufacturing slowdown in the world’s second largest economy cast a dark cloud over the red metal. The scenario in the U.S. – the world’s second-largest copper user — also turned worse with the polar vortex literally freezing a ton of economic activity across the country.

Turnaround Coming?

However, spring brought some relief for the metal. First, the manufacturing numbers for June indicate that the most important emerging market – China – is returning to life with support from some mini-stimulus measures taken by its government. The Chinese stimulus plan was basically targeted at railways and other construction projects (read: Will the China Stimulus Boost Copper ETFs This Quarter?).

If this was not enough, housing recovery in the U.S. brought copper back on the table, if we go by a Bloomberg report. New home sales for the month of May increased to the highest level in six years. Needless to say, the rise breezed past the consensus estimate. Existing home sales too increased at the fastest pace in seven months.

A revival in the labor market, expansion in inventories and a drop in mortgage rates led to these optimistic data points. The jobless rate fell to 6.1% in June indicating the best performance since September 2008. Other data points like manufacturing and consumer confidence in recent days also came in favor of economic growth.

In fact, some economists even started to feel that an attainment of 4.0% annual growth rate for Q2 is possible indicating that a higher level of U.S. economic activity will definitely lead to increased usage of this industrial metal.

Market Impact

Helped by these positive points, copper prices registered the biggest quarterly gain since September. To reflect these gains, exchange traded products like iPath DJ-UBS Copper TR Sub Index ETN (JJC), iPath Pure Beta Copper ETN (CUPM) and United States Copper Index Fund (CPER) added more than 3% last week.

Can the Uptrend Last?

Copper ETPs are presently up in the air with possibilities and perils weighing almost the same. While some market experts expect to see supply glut through 2015 and 2016 for the metal, the surge in demand from the uptick in industrial activities in China and the U.S. cannot be ruled out (read: Where Will Copper ETFs Go From Here?).

Investors should also note that the Chinese economy is still to reach its pre-crisis level. Most market experts believe that China will grow by less than the 7.5% annual target rate set by the country. On the other hand, after sliding 2.9% in Q1, the U.S. GDP is yet to show sustained improvement.

Whatever the case, the short-term outlook for the red metal and the related ETFs definitely appear bright. For these reasons, it could be time for some investors to take a closer look at the copper market once again.

The Fed is also helping copper prices in the near term by not raising short-term interest rates this year, and a robust recovery seems little unlikely at this point – both for America and China. Notably, an accommodative monetary policy will keep the greenback in check and help commodity investing (read: Record-Low Dollar Volatility Puts These ETFs in Focus).

Thus, copper ETPs can be enticing options for short-term play. Over the long term, especially after the Fed wraps up its QE program and raises interest rates, copper ETPs could be avoided, though investors will have to wait and see what happens both in China and the U.S. for clues.

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