Dr. Copper Is Looking More Fit

|
Includes: CPER, CUPM, JJC
by: Motif Investing

Summary

Copper prices recently hit a one-month high as the dollar fell on weakening interest-rate hike fears.

Recent data suggest China's economic growth is on track, with copper demand holding steady.

With stocks struggling mightily this year - the Nasdaq touched a 22-month low on Monday - few sectors have offered much promise.

However, some investors have enjoyed early success rotating into industries that suffered in recent years while the broader market was ramping higher.

Take copper, for example. The industrial metal had been in a solid price decline over the past couple of years, only occasionally showing signs of life. Even since the beginning of 2015, prices of the metal have slid more than 25%.

Last week, however, copper prices hit their highest level of 2016 as a weaker dollar sparked investor demand for the industrial metal and drove bearish traders out of the market.1

Copper futures for the most actively traded March contract rose 1.8% to settle at $2.13 a pound on the New York Mercantile Exchange, their highest mark since New Year's Eve. As The Wall Street Journal reported, since nearing their lowest levels since early 2009 in mid-January, copper prices have rallied about 9%.

Other copper-related investments also have performed relatively well lately. The Dr. Copper motif has gained 3.3% in the past month. In that same time, the S&P 500 has lost 3.6%. Over the past 12 months, the motif has fallen 44.9%, while the S&P is off 9.8%.

The recent gains by copper have come amid financial market turmoil and generally weak economic signals, supporting the idea that the biggest driver of the increase has been a weakening US dollar. Copper, denominated in dollars, gets cheaper as the US currency weakens, driving stronger investment flows and commercial demand, the Journal noted.

Financial speculators in copper, such as hedge funds, have been strongly bearish on the market since early November, amid signs of weakening economic growth around the world, the Journal said. Some of the recent gains were probably fueled by traders closing out short positions that profit from falling prices as the market has rallied against them, it added.

Last week, investors dumped the dollar amid falling interest rate expectations in the US and continued nervousness about the global economy. The WSJ Dollar Index, which compares the dollar against a basket of 16 commonly traded currencies, fell to its lowest level since early November.

But copper's recent lift hasn't been all currency-induced. The Journal pointed out that the head of China's top economic planning agency said last week that the country's economic growth target in 2016 remains in a range of 6.5-7%. That helped mitigate concerns about the country's economic slowdown.2

China is the world's biggest copper consumer, accounting for about 45% of global demand.

And the country's demand appears to remain strong. China's General Administration of Customs said refined copper imports in December weighed in at 423,181 tons - a rise of 34% compared to the same period last year, and the fourth consecutive month of strong imports, the Journal reported.

Between January and December, imports were up 2.5% on the year at 3.7 million tons.

"Despite headlines suggesting that China's economy is collapsing, metals demand is actually picking up," Oliver Jones, an economist at Capital Economics, wrote in a research note cited by the Journal.

In addition, Chinese authorities plan to reduce the minimum down payment required for first- and second-time home buyers in most cities, a move aimed at clearing a housing glut.3 China's construction sector accounts for 25% of copper demand and 35% of aluminum demand, according to Reuters.

Many analysts believe further gains for copper prices won't come without a rebound in oil markets, which are dictating sentiment across financial markets.

"Our core view is that oil prices will rebound in the second half of the year, which would help drag up commodities [such as copper]," David Wilson, director of metals research and strategy at Citigroup, told the Journal.

Despite a sharp sell-off since early November, oil rebounded in recent weeks, in large part from speculation that members of OPEC and Russia would start working together to cut output and help balance the market, according to the Journal.4

However, many leaders from those countries have said they aren't ready to cooperate, a stance reaffirmed when Saudi Arabia and Venezuela failed to reach any deal, it said.

For people invested in copper stocks, keeping one eye on oil prices could be imperative over the near term.

--

1. Christian Berthelsen and Ese Erheriene, "Copper Hits High for the Year as Dollar Weakens," WSJ.com, February 4, 2016.

2. Ese Erheriene, "Copper Rises on Strong Chinese Imports," WSJ.com, January 26, 2016.

3. Reuters, "Copper heads up as inventories decline," skynews.com.au, February 4, 2016, (accessed February 8, 2016).

4. Timothy Puko and Georgi Kantchev, "Oil Prices Slide Again as Oversupply Fears Persist," WSJ.com, February 8, 2016.