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Copper ETPs’ Underperformance is Worrisome for the Broader Economy

This article was originally published on ETFTrends.com.

After touching a near four-year high in 2017, copper prices, along with related exchange traded products, have weakened this year, underperforming the broader commodities market.

Copper prices have declined 5.9% in 2018, with Comex copper futures now trading around $3.121 per pound. The metal is now underperforming the benchmark S&P GSCI Index of 24 commodities by its widest margin over the last two decades, other than the start of 2016, reports Amrith Ramkumar for the Wall Street Journal.

The iPath Bloomberg Copper Subindex Total Return ETN (JJCTF) declined 7.5% and United States Copper Index Fund (CPER) fell 7.1% year-to-date. Meanwhile, the iShares S&P GSCI Commodity-Indexed Trust (NYSEARCA: GSG), which tracks the S&P GSCI Total Return Index, gained 11.5% so far this year.

The widening gap between copper prices and the broader commodities index is concerning for investors because copper is used to build everything from airplanes to smartphones. Copper's underperformance is particularly noteworthy when compared to crude oil's 20% gain this year - oil and copper are two of the most actively traded commodities.

Diminished Demand for Raw Materials

Some observers pointed out that the escalating trade-war rhetoric may have contributed to protectionist trade policy fears. Traders may have been worried that the slower activity and impediments to free trade would lead to a weaker global economy, which would diminish demand for raw materials like copper. Furthermore, fears of an economic slowdown in China, the world's largest commodity consumer, and recent data out of Europe and Japan have exacerbated concerns.

“Growth isn’t as synchronized as it once was,” Edward Meir, a strategist at broker-dealer INTL FCStone, told the WSJ. “Copper is reacting more to that slowdown.”

For instance, Chinese data revealed construction activity rose 7% over the January through April period year-over-year, compared to median estimates of 7.4%. China makes up almost half of the world's copper consumption.

Japan's economy, the third largest in the world, contracted in the first three months of the year due to weak private consumption and business investment. Europe's economic growth slowed to 1.7% in the first quarter, compared to a 2.3% expansion in the U.S.

Furthermore, rising Treasury yields and a stronger U.S. dollar are also weighing on commodity plays in general. Higher yields tend to make commodities less attractive since the hard assets don't provide a yield while a stronger dollar makes them more expensive to foreign buyers that have to pay for US-denominated commodities.

“You can’t ignore the dents in the bullish argument for copper and the global economy,” Tyler Richey, co-editor of investment research publication the Sevens Report, told the WSJ. “There’s a lot of concerns out there.”

For more information on the copper market, visit our copper category.