Ultimate Guide To Copper Investing

Copper is one of the oldest metals, having been used as currency more than ten thousand years ago. Copper has also been instrumental in the development of human civilization, playing a key role in various developments throughout history. Copper’s widespread use has not diminished; it is still one of the most widely-used industrial metals, a key component of construction activity and other industrial uses around the globe. It has also become popular as an investable asset, acting as both a potential inflation hedge as well as an opportunity to profit from increased demand for raw materials from emerging markets. There are a number of different options for investing in copper, including exchange-traded futures contracts, stocks of companies engaged in the extraction and sale of the metal, and both physically-backed and futures-based ETFs and ETNs [see also Company Spotlight: Barrick Gold Corporation (ABX)].

Physical Properties And Uses Of Copper

Copper shares many physical properties with precious metals such as gold and silver; it has high thermal and electrical conductivities, making it malleable. Copper is an excellent conductor of both heat and electricity, and is resistant to corrosion. Moreover, the malleability of this element allows it to be drawn into wire, which makes copper ideal for electrical applications such as circuit boards and residential wiring and plumbing.

In addition to copper wire and copper piping, the reddish-orange metal is used 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. Copper is also used in statues; the Statue of Liberty, for example, contains more than 80 tonnes of copper [see also Commodity Investing: Physical vs. Futures].

Copper Supply And Demand

Demand for copper has surged over the last several decades as developing economies such as China and India have begun demographic shifts that have led to increased urban populations and a considerable need for additional infrastructure. The Andean region of South America, which includes Chile and Peru, is the most active copper producing region in the world, accounting for close to half of global supplies in recent years. Because of this concentration of production, supply disruptions in the region have the potential to move prices sharply. Mine strikes, natural disasters, or spikes in geopolitical tensions in the region often send global copper prices higher in the short-term [see also Three Mining Companies With Robust Yields].

Chile is home to more than 20% of the world’s copper reserves, and has accounted for more than a third of mine production in recent years. Other major copper producers include Peru, China, and the U.S. Australia maintains the third largest copper reserves, but accounts for a relatively small portion (about 6%) of global mine production:

Country 2009 Production 2010 Production Reserves
U.S. 1,180 1,120 35,000
Australia 854 900 80,000
Canada 491 480 8,000
Chile 5,390 5,520 150,000
China 995 1,150 30,000
Indonesia 996 840 30,000
Kazakhstan 390 400 18,000
Mexico 238 230 38,000
Peru 1,275 1,285 90,000
Poland 439 430 26,000
Russia 725 750 30,000
Zambia 697 770 20,000
Other Countries 2,190 2,300 80,000
Global Total 15,900 16,200 630,000

China is one of the world’s largest importers of copper, importing more than 360,000 tonnes in January 2011.

Copper is somewhat unique in that it can be easily recycled without diminishing the quality of the product. Copper is one of the most widely recycled metals, and by some estimates as much as 80% of the copper ever mined is still in use today. According to the U.S. Geological Survey, old scrap converted to refined metal and alloys provided 160,000 tons of copper in 2010, equal to about 9% of consumption. In total, refined or remelted scrap contributed about 35% of the U.S. copper supply in 2010 [see also Invest Like Jim Rogers With These Three Agriculture Stocks].

Price Drivers

As a global commodity, the price of copper is impacted by a number of factors, and is often subject to significant price swings in a relatively short period of time. The major price drivers of copper include:

  • Emerging Market Demand: Copper demand has surged in recent years thanks to urbanization in emerging markets such as China and India; as emerging market populations move to cities, the need for new residential housing, transportation infrastructure, and other construction has climbed. China in particular is a major copper buyer, and the health of the Chinese economy is a major factor in determining copper prices.
  • Health of Homebuilding Industry: In the U.S. the homebuilding industry is a major buyer of copper, which is used in pipes, wiring, and other components of residential buildings. Copper prices plummeted during the recent recession when homebuilders were battered, and surged during the subsequent recovery.
  • Supply Disruptions: Because a significant portion of global supplies come from South America, supply disruptions in the region can have a major bearing on global prices. Strikes at major copper producing mines are relatively common, and natural disasters—such as earthquakes or landslides—occur from time to time as well.
  • Use of Substitutes: Technological advancements have made possible substitution of cheaper metals for copper in certain applications. For example, aluminum now substitutes for copper in power cables, electrical equipment, automobile radiators, and cooling and refrigeration tube, while titanium and steel are used in heat exchangers. To the extent that additional substitutes are developed for roles traditionally performed by copper, there could be downward pressure on prices.

Investing In Copper

Copper has appeal as an investable asset for several reasons. First, the metal tends to correlate to economic expansion in emerging markets, where ongoing urbanization has resulted in increased demand for raw materials. Copper also has potential to act as an inflation hedge, appreciating in value when prices broadly rise.

Physical Copper

Options for investing in physical copper are limited, simply because the relatively low value-to-weight ratio of the metal requires significant storage space for any amount of copper that has a material value. Prior to 1982, pennies were made of 95% copper. That prompted some to melt down the currency when copper prices rose to the point that the materials used to make the coin were more valuable than the coin itself. Since 1982, pennies have been made from a mixture of zinc and copper. And under a law passed in 2006 it is illegal to melt coin currency, with violators facing up to five years in prison and $10,000 in fines.

There are also exchange-traded products offering exposure to physical copper. The ETF Securities Physical Copper ETF, which trades on the London Stock Exchange under the ticker PHCU, is backed by physical metal stored at London Metal Exchange warehouses, the ownership of which is evidenced by LME warrants or warehouse receipts.

Copper Futures

Copper futures are traded on the Chicago Mercantile Exchange, with contracts prices in cents per pound and each contract representing 25,000 pounds. Listed contracts include those for delivery during the current calendar month, the next 23 calendar months, and any March, May, July, September, and December falling within a 60-month period beginning with the current month. Delivery may take place on any business day beginning on the first business day of the delivery month or any subsequent business day of the delivery month, but not later than the last business day of the current delivery month.

Trading terminates on the third-to-last business day of the delivery month. Trading at settlement is allowed in the active contract months of March, May, July, September, and December.

Copper futures are subject to NYMEX position limits.

Copper Miners

Investors can also obtain exposure to copper by purchasing stocks of companies that are engaged in extracting and selling the metal. Like most companies, the profitability of copper miners depends on the prevailing market price for the products they sell. As such, mining companies tend to realize higher profits when natural resource prices are elevated—especially if significant portions of the cost structure are fixed in nature. Mining stocks tend to trade as a leveraged play on the underlying resource, meaning that the movements in price are often more significant than changes in the related commodity over the short term.

Many of the largest mining companies are engaged in the extraction of a variety of resources, including various precious and base metals. There are, however, a number of “pure play” mining companies and firms whose primary focus is copper:

  • First Quantum Minerals (TSX: FM)
  • KGHM Polska Miedz (PW: KGH)
  • Lundin Mining Corp

[see the holdings of the Global X Copper Miners ETF for a more detailed list of copper miners]

Copper ETFs

There are multiple ETFs offering exposure to copper as well, including both funds that invest in futures contracts and funds that invest in stocks of copper miners. The iPath Dow Jones-UBS Copper ETN (JJC) is linked to an index comprised of copper futures, and charges an expense ratio of 0.75%. For exposure to copper miners, there are two ETF options:

  • Global X Copper Miners ETF (COPX)
  • First Trust ISE Global Copper Miners ETF (CU)

As mentioned above, the Andean nations of South America are among the largest producers of copper. As such, while the economies of these countries have become increasingly diversified in recent years, there is still a link between prices of copper and economic strength. As such, the following country-specific and region-specific ETFs may also be impacted by the price of copper:

  • iShares MSCI Peru Index Fund (EPU)
  • iShares MSCI Chile Index Fund (ECH)

Resources On Copper Investing:

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