Time to Bet on the Beaten-Down Copper ETFs?
Some of Wall Street's biggest banks in recent weeks have suggested a combination of short-term supply tightness and a global push for green investments will act as tailwinds for copper, as quoted on…
Copper — traditionally seen as a leading indicator of economic health — has had a tough year. United States Copper Index Fund (CPER - Free Report) is off 14.6% in the year-to-date frame (as of Dec 13, 2022).But analysts expect a recovery in copper prices in 2023 despite the likelihood of a bleak global economic outlook.Some of Wall Street's biggest banks in recent weeks have suggested a combination of short-term supply tightness and a global push for green investments will act as tailwinds for the red metal, as quoted on CNBC.Let's delve a little deeper.Supply CrunchThere are constant warnings from miners that a 'huge deficit' is looming for the key industrial metal – copper. Glencore Plc, which is one of the world's top copper miners and traders, recently indicated that while some people were assuming that the industry would boost supplies as it had in previous cycles, 'this time it is going to be a bit different,' as quoted on mining.com.With decreasing prices, as well as the growing likelihood of a global recession, the strategist says the incentive for suppliers to create new copper mines falls.
The biggest copper producers in 2021 were Chile, Peru, the Democratic Republic of Congo (DRC) and China, Political unrest is quite frequent in Chile, Peru and DRC. Last year, it was reported that Chile's copper production started to threaten the country's water supply, as quoted on abc.net.au.Global Push for Clean EnergyCopper is used in electric vehicles and renewable energy productions. Emerging trends for making the world carbon-free, President Biden's intention to boost clean energy in the United States, Europe and China's keen efforts to spread clean energy over the long run are good for copper demand.According to a 2021 report by Goldman Sachs, by its lowest estimates, renewable energy sources – like wind, battery and solar – will drive copper demand up about 600%, or 5.4 megatonnes, by 2030, quoted on ABC.net.au.
In the case of "hyper adoption of green technologies", this demand would jump to 8.7 megatonnes by 2030, an uplift of 900%, according to the report.China's Supportive MeasureChina matters the most for this metal as the country is the world's biggest consumer of this industrial metal, making up roughly 40% of the global copper demand. Gradual reopening of Chinese cities after a strict zero-Covid policy in 2022 is likely to boost the demand for copper in the Country. China is also providing supportive measures to its ailing real-estate sector.
The country has also indicated to have lowered the crackdown on all-important technology sector.Likelihood of Moderation in Greenback StrengthThe Fed has recently indicated that it is likely to slower the rate hike pace. If the rate hike momentum cools down, the U.S. dollar may lose the immense strength that it gained in 2022.
Notably, most of the commodities are priced in the U.S. dollar. Hence, a decline in the greenback is a plus for the U.S.
dollar.Price ProjectionsGoldman last week hiked its 12-month forecast to $11,000/t from $9,000/t and upgraded its average price forecast to $9,750/t for 2023 and $12,000/t in 2024.Fitch maintained a spot copper price assumption of $8,000/t for 2023, dropping to $7,500/t in 2024 and 2025, quoted on CNBC.However, other institutions retain a bearish view, at least in the short term. BNP Paribas in its 2023 outlook forecast a three-month copper price of $6,800/t in the first quarter of next year, falling to $6,465/t in the second, but recovering to $8,250/t by the end of 2024, per the CNBC article.'We expect a fall in European manufacturing activity to add to the impact of slowing Chinese and U.S. activity,' the French lender said.
'Rising mine supply and accelerating output of Chinese refined copper are expected to push the market into a sizeable surplus in 2023, easing LME spread tightness and weighing on prices,' published on CNBC.Against this backdrop, investors may want to keep a close tab on the below-mentioned copper ETFs.ETFs in FocusUnited States Copper Index Fund (CPER - Free Report) The underlying SummerHaven Copper Index Total Return reflects the performance of the investment returns from a portfolio of copper futures contracts on the COMEX exchange. The fund charges 88 bps in fees.iPath Series B Bloomberg Copper Subindex Total Return ETN (JJC - Free Report) The Bloomberg Copper Subindex Total Return reflects the returns that are potentially available through an unleveraged investment in the futures contracts on copper. The note charges 45 bps in fees.