Should you invest in copper at new all time-highs?

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The industrial metal, often dubbed ‘Dr Copper’ for its predictive power on the global economy, has been on a roll this year. Belonging to Group 11 in the periodic table, the element (ticker ‘Cu’) is a malleable component with many industrial applications. So good is copper’s electrical conductivity that it is a major input to electric vehicles. Each of these battery-powered EV requires 132 pounds of copper.

So far this year, copper has risen about 30 per cent. What’s more, prices rallied all the way to establish new all-time highs (see below). This is a significant breakout, however marginal.

Another point mentioned here is that other industrial metals like Nickel and Aluminium have also rebounded sharply this year. The latter is forming such a perfectly rounded base that a breakout seems imminent.

Copper’s near-vertical advance this year has three broad implications.

  1. The global economy may performing better than expected. If you chart copper’s historical rallies over time, you will find that its past cyclical uptrends almost coincided with upswings in the global economy (2021, 2009, and 2004).
  2. Market liquidity remains ample. The stunning rally in US equities and crypto over the past year suggested that the high borrowing costs are not denting investor enthusiasm for risk. Yes, there are some bearish trends like China. But we also are also seeing new stock market highs in India, Japan, UK, some European indices, and most importantly, the US. These rallies generate new liquidity and widen risk appetite. Many funds are piling into commodities.
  3. If we cast our eyes further, the wider commodity market is roaring ahead, too. Earlier this year, we saw Cocoa’s spectacular uptrend into the five-digit level. Precious metals (gold in particular) also jumped to new long-term highs. With these growth in raw material prices, inflation may rebound later this year. The scope for interest rate cuts could be narrowing faster than anticipated.

How to invest in copper?

If copper is performing this well, you may wonder how should we to get exposure to this metal?

The first place to look at (leveraged futures contracts and spread bets aside) are ETFs that invest in the metal directly. One such industrial commodity ETF that focuses on industrial metals is the Invesco DB Metals (DBB). The fund, which holds copper, zinc and aluminium in its portfolio (factsheet), allows the shareholders to spread the risk slightly amongst the three metals. Chartwise, it has rebounded from $17 to $21 to reverse its multi-quarter decline.

The second area to place bets on the bullish copper metal are miners. These companies mine the ground to extract the metal. Their profit margin derives from difference between the cost of production and sales of copper ore/metal.

In the UK, the most concentrated copper bet is Antogafasta Plc (LSE:ANTO). With mines in the copper-rich region of Chile and Peru, Antofagasta’s copper production this year is estimated to be around 670-710,000 tonnes. Its share price have been rallying hard over the past few months on strengthening copper prices (see below).

Another interesting copper stock with high positive momentum is Southern Copper (US:SCCO) listed in the US. Freeport McMoRan (FCX), a large copper producer, just broke new all-time highs.

The last area to invest in are ETFs that hold these miners. For instance, the $2.6 billion Global X Copper Miner ETF (COPX, factsheet) has a portfolio of copper miners. One advantage of using this fund is that it spreads the sector risk with 40 holdings. Two, these holdings can be from many non-US stock exchanges. Investors thus have a global copper mining exposure with this fund alone.

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Final Remarks

The core message from the runaway copper prices is that the economy may be doing better than expected. Shortages of copper (due to deteriorating ore quality from existing mines) may be exacerbating this problem. Of course, the bears will highlight that, after a strong rally, it could be dangerous to get involve in the copper sector. The risk reward ratio is simply too poor. Whilst this may be true, some exposure – albeit with tight risk discipline – may still be desirable.

 

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