3 Reasons Why the Copper ETF Is Soaring

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Copper prices have continued their impressive rally this week, as the widely-used industrial metal finished higher on Thursday up for the seventh time in eight trading sessions, bringing its return over that period above 15%. The recent surge in copper prices has been driven by a number of factors, and many investors believe that the metal still has room to climb. Copper’s recent run-up is attributable to three primary factors:

1. China’s Insatiable Materials Appetite

Renewed hope that one of the world’s largest users of the metal, China, will continue its rapid consumption have fueled a rise in prices, as the developing economy continues to grow at an impressive rate. Chinese markets have been closed for Lunar New Year celebrations this week, but are expected to climb higher when investors return. Analysts at UBS recently noted that “China is short of intermediate and refined copper products,” and that, “even a modest demand growth scenario for 2010 will require a robust restocking event, almost regardless of the constraints on trade posed by China’s tightening credit markets.” Concerns over China’s next policy moves and a slowdown in growth have weighed on equity and commodity markets in recent weeks, but it now seems that no matter what happens with Chinese monetary policy the demand for copper will continue to be strong.

2. “Restocking” Requirements

Barclays Capital is also very bullish on the metal, with some analysts expecting that copper prices may jump by as much as 34% in 2010. “The combination of growth starting from a very low base and still very stimulative, depression-combating economic policies will continue to support growth at least for the first half of this year,” said Yingxi Yu, an analyst for Barclays in Singapore. “There is likely to be a phase of restocking in the OECD countries, which have gone through a period of aggressive destocking, and that should help to contribute to the growth numbers as well.” Barclays also forecasted global growth of 4.2% for the calendar year, which is far more robust that what several sources were predicting just a few months ago. The revised projections suggest that perceptions of the economy are beginning to turnaround, especially in emerging markets.

3. Impact of Inflation

Finally, recent PPI numbers suggested that inflation is beginning to appear, as the the index of producer prices rose 1.4% for January. The most striking uptick was in the crude goods sector, which was up 9.8% to start the year. This uptick is especially drastic when considering that the index was up a meager 0.4% in December and up just 0.8% for the year. Some investors see the PPI as an accurate forecaster for the CPI, assuming that a majority of the price increases among producers will eventually pass on to the consumers in the form of higher prices (for a guide to other ETFs that may do well in an inflationary environment, see 10 ETFs to Protect Against Inflation).

These three factors have combined to produce copper’s remarkable gain over the past two weeks, leaving investors to wonder if the trend will continue or if rate hikes and trouble in the euro zone will send the metal plunging back down. As always, investors should remain cautious when dealing with volatile metal markets, keeping in mind that copper could sink just as quickly as it rose over the past 10 days.


Disclosure: No positions at time of writing