Copper is perhaps the most popular industrial metal, not only in its application to the real world, but also from an investing standpoint. As one of the most versatile and important metals, it makes sense for copper to be an investor favorite, after all, copper has an endless list of uses. Among plumbing and wiring, copper also shows up in power generation and transmission, heating and cooling systems, and telecommunications equipment. Copper is a key part of motors, brakes, and other auto parts, and is widely used in electronic products as well [see also Ultimate Guide To Copper Investing].
But while this metal is used in numerous products and processes, the global economic issues have started to take their shots at the metal’s underlying price. The past few months have seen a number of worries from all over the world, leading to a number of analysts calling for a recession. A recession means less building and producing, which inevitably means less demand for copper, driving down the price. Copper spent the majority of 2011 above the $4/LB range, but the recent economic turmoil has created nasty headwinds for its future [see also Detailing Gold’s Wild Q3].
The current price of copper is flirting with $3/LB; levels not seen for over a year. A quick glance at the metal’s historical prices reveals that it traded down near the $1/LB range during the height of the 2008 recession, and was able to recover all the way back to nearly $4.50. But beginning in August, the ferocious market volatility took its toll on this asset class, as the DJ-UBS Copper Total Return Sub-Index ETN (JJC) lost 7% during the month. JJC is a popular benchmark for copper prices, as it maintains steady futures exposure [see also 25 Ways To Invest In Silver].
For the time being, it appears that outlook is the biggest obstacle for this industrial material to overcome; investors simply don’t see the global economy heading in the right direction, so investing in copper doesn’t make sense when you don’t believe in growth. In fact, Freeport-McMoRan Copper, the largest publicly traded copper producer, has shifted its business model from a U.S. and Europe focus, to emerging markets in the Middle East to avoid stagnant growth. “Copper has dropped 29 percent this year as mounting concern about growth eroded expectations for supply shortages. Europe accounts for about 20 percent of Freeport’s sales, and the U.S. about 30 percent, according to Javier Targhetta, who is senior vice president of marketing and sales” writes Agnieszka Troszkiewicz.
With all of the turmoil in the metal’s price, and a foggy outlook on the economy, copper presents itself as an interesting play in the current environment. Some may wish to establish short exposure if they believe the bottom has yet to be hit, but others may see today’s low prices as a good buying opportunity. Below, we outline three ways to make a play on copper [see also A Closer Look At The Lithium ETF (LIT)]:
DJ-UBS Copper Total Return Sub-Index ETN (JJC)
This ETN comes from iPath and invests in Copper High Grade futures on the COMEX. As an ETN, this product will not experience any tracking error, but it will carry a credit risk from its issuer. The fund charges 75 basis points and is a popular commodity ETP, exchanging hands over 363,000 daily in September. Unfortunately, when it comes to returns, JJC has had a dismal year, losing 32% in 2011. At such low prices, this ETN may be a good discount opportunity, or simply a product to avoid for the time being [see also 50 Ways To Invest In Gold].
Freeport-McMoRan Copper (FCX)
As mentioned earlier, FCX is the largest publicly traded copper company in the world. While U.S. and European demand is screeching to a halt, Asian demand has remained steady, which will hopefully be enough to keep this company in the black until the dust settles. Freeport offers an enticing dividend yield of 3.30%, putting it on the radar for a number of value investors striving for income. FCX is also a great trading instrument, as it offers supreme liquidity with and ADV of 20 million and assets topping $30 billion. Investors should note, however, that the stock is down over 45% YTD, so steady demand may not be enough to overcome copper’s demise [see also Crude Oil Crushed: Buy or Sell?].
High Grade Copper Futures (HG)
Traded on the COMEX, these contracts represent 25,000 pounds of copper and are quoted in U.S. dollar and cents. For active traders who fully grasp to complexities of futures, this may be the best way to make a speculative play on the metal, as these contracts are very popular and accessible. Copper contracts saw a volume of 1.14 million in Septmber, representing an 89% increase from the previous month, as a number of traders have hopped in on this volatile commodity.
Disclosure: No positions at time of writing.