4 ETFs Impacted by China's Copper Hunger

Includes: COPX, CU, ECH, JJC
by: Kevin_Grewal

Over the last two years, the price of copper has skyrocketed on the assumption that demand will outpace supply of the industrial metal; however, recent warning signs indicate that copper’s uptrend could come to an end.

According to Carolyn Cui and Tatyana Shumsky of The Wall Street Journal, the rise in copper prices has primarily been driven by the belief that China has an insatiable appetite for the metal. This may be true to some extent, as China’s consumption of the metal more than doubled in 2008 and 2009 as the emerging market witnessed exceptional economic growth and urbanization prevailed. Further price appreciation was supported by the fact that China’s demand increased while global mine production remained relatively stable growing at nearly 19% between 2000 and 2009 (keeping pace with global consumption).

Although China’s demand for copper is likely to continue due to its economy’s size and growth in industrial production, electricity usage and fixed-asset investment, it is expected that the nation’s successive rounds of interest rate increases and moves to slow down speculation could have a negative impact on copper prices.

Furthermore, concern has been brought on by evidence that copper stockpiles in China are close to 15 percent of the nation’s annual consumption, which could impact copper prices as imbalances in supply and demand fade away. This indicates that a lot of the copper that the nation purchased has not been put to use and is being stored with the fear or hope that copper prices will continue to rise. Eventually, this copper will make its way back into the market and could result in a supply shock. In fact, during the first two months of this year, China exported 42,600 metric tons of refined copper, which is eight times higher than the amount exported during the same time period last year.

If the above mentioned trend continues to prevail and copper’s uptrend comes to an end, the following ETFs are likely to be impacted:

  • iPath DJ-UBS Copper TR Sub-Idx ETN (NYSEARCA:JJC)
  • First Trust ISE Global Copper Index (NASDAQ:CU)
  • Global X Copper Miners ETF (NYSEARCA:COPX)
  • iShares MSCI Chile Investable Mkt Idx (BATS:ECH): Chile’s economy is heavily dependent on copper as that the Latin American nation has become the copper mining capital of the world producing over one-third of global copper output.

Disclosure: No Positions