Emerging Markets’s Fragile Growth Rattle Investors
After dropping 11% from its record price three months ago, copper’s looking a little more appealing, especially if
investors factor in prospects for strong economic growth from emerging markets.
But the recent weakness in copper, which is often used to gauge the health of the world’s economies, may be the tip-off investors need to realize that
stellar growth among developing countries is fragile.
“Much of the run-up/return of prices in the past two years has been based on a belief that the recession is/was/has ended, and that robust economic
growth would return,” said Jeffery Born, a professor at the College of Business Administration at Northeastern University in Boston.
“The more speed bumps that the developed economies of the world encounter on the road to recovery/growth, the more these bullish assumptions come into
doubt,” he said, adding that the “list of bumps is extensive,” from natural disasters in Japan, New Zealand, Australia and the United States, to the
European Union sovereign-debt problems, slow growth in U.S. employment and federal debt.
Copper futures prices hit a record of $4.63 a pound in mid-February on the Comex division of the New York Mercantile Exchange. Prices had
experienced a relatively steady climb since early June of 2010, gaining more than 60% until the peak earlier this year. They closed at $4.11 on Thursday.
Copper prices around $3.50 to $4 a pound are likely a comfortable range, said Christopher Ecclestone, mining strategist at Hallgarten & Company LLC. So
copper is “neither cheap nor expensive at current levels.”
The price is “enough to keep mining owners producing and to motivate deposit holders to continue moving towards production,” he said. “Below $3, most
deposit owners will probably sit on their hands rather than move towards mining.”
But a slowdown in growth among some of the world’s economies has complicated the situation for investors.
The question is whether economies “slow to a still-positive pace, or we dip back into global recession,” said William DeShurko, president of 401
He said emerging-market economies are too strong to fall into negative growth territory, and China has shown the ability to both slow and increase the
pace of its economic activity.
“China still has many arrows in their quiver to accelerate their economy,” said DeShurko, who is also a model manager on Covestor, a mirrored investing
firm, so while growth in copper demand may moderate, there will still be growth in demand.
Unfortunately, global economic data hasn’t been very convincing lately.
“Global economic growth appears to be cooling, translating to less demand for copper and a lower copper price,” said Sam Kirtley, chief executive
officer of SK Options Trading. “We would need a pick-up in growth, particularly in the emerging economies, to give copper a boost.”
And the copper market hasn’t really seen that climb in growth from the world’s largest consumer of the red metal.
“Copper can be a particularly good indicator of the Chinese economy because China uses 40% of the world’s copper,” said Sean Brodrick, a natural
resource analyst for Uncommon Wisdom Daily.
The bad news is China imported 21% less in the first quarter than the same period a year ago, he said.
For April, data show that refined copper imports dropped 17% from a month earlier, though imports remained above the more-than-two-year low seen in
Goldman Sachs also recently downgraded its view on Chinese economic growth to 9.4% from 10% for fiscal 2011. Read more about the China GDP forecast.
China’s recent economic growth has slowed, “given inflation-related tightening and industrial supply-side shocks,” including the disruption of
industrial supplies from Japan, said Josh Crumb, a director at Astur Gold Corp.
But “positioning in copper just needs to follow China, not try to lead it,” he said. “When China is buying, prices have upside. When positioning
overshoots and Chinese destock, you should probably get short.”
A big portion of copper demand also comes from other emerging markets, such as Brazil, Russia and India which, together with China, are known as the
There’s been a strong correlation between the iShares MSCI BRIC Index Fund 0.00% and copper prices in the last two years, according to Michael Arold, a
Covestor model manager.
The BRIC exchange-traded fund started to show weakness in January, much earlier than copper, he said. The BRIC markets might “hold the key to
understanding future short-term copper prices, since they seem to be the leading factor.”
“So far, these markets have been moving sideways, and like copper, BKF is at a very critical technical support level at $46, he said, adding that
should the fund break this level, copper is likely to follow.
Still, the outlook for copper isn’t all that bad.
Redevelopment of Japan’s infrastructure, following the decimation from the recent earthquake and ensuing tsunami, is one factor that should be
beneficial to copper, said Kevin Mahn, chief investment offer at Hennion & Walsh Asset Management.
And though Chinese demand has abated of late, “we do not see any research to suggest that overall demand for copper should lessen significantly at any
point in the near future,” he said.
As with all commodities, but particularly with copper right now, a good investment strategy is crucial.
The best way for individual investors to play copper is the iPath Dow Jones-UBS Copper Total Return Sub-Index Exchange-Traded Note, said
Matthew Tuttle, chief executive offer at Tuttle Wealth Management in Stamford, Conn. “It gives actual exposure to physical copper, not copper stocks,
which could be influenced by other factors.”
But the ETN is really a way to play copper as prices are climbing, he said, so he would wait for copper to move higher, and for commodities across the
board to show strength before investing.
DeShurko, of 401 Advisor, said the price of JJC is about where it was at its peak in 2008, global gross domestic product is higher today than it was in
2008, and copper, as a very economically sensitive commodity, should be higher today than in 2008.
In the meantime, some copper stocks are worth a look.
Shares of Southern Copper Corp. have fallen 26% year-to-date, and the stock has a dividend yield of more than 6%.
Compared to the 8% year-to-date drop in copper futures, “it looks like the stock has room to rebound if the price of the metal just stabilizes,” said
“I really like the idea of getting paid 6.45% while you’re waiting for that rebound,” he said, noting that his firm owns SCCO in client accounts.
Other suggestions to play copper include large, broad-based global miners like Rio Tinto PLC and regionalized miners such as
Yamana Gold Inc., which maintains low production costs — “a nice advantage during pullbacks” in copper prices, said Robert Laura,
president of Synergos Financial Group.
Copper isn’t the primary metal for RIO and AUY, but the stocks offer exposure for more risk-adverse investors and provide a “nice hedge for inflation
and global unrest … with gold and other metal production,” he said, noting that he has positions in RIO, AUY and SCCO.
Copper futures, meanwhile, are the “purest” way to play a short-term bullish view on copper given that these contracts are mainly used for investors
that have a time horizon of less than one year, said John Longo, professor of finance at Rutgers Business School in Newark. But they involve significant
leverage, so they are not for inexperienced traders.
In the futures market, be cautious with copper, especially with short-covering rallies for the rest of this year, said John O’Donnell, chief knowledge
officer at the Online Trading Academy.
He expects copper to trade “south of $3.20” per pound and eventually under $3. Copper price rallies need to be “short sold,” either with futures contracts
It’s also important for investors to be realistic about copper’s prospects.
“Copper is always a distant third in a race with gold, silver and copper ... amongst ‘hard money’ investors,” said Northeastern University’s Born, who
also has a Ph.D. in finance.
Copper is driven far more by usage than the other two — and fundamentals are not heading upward, he said. “Copper’s risk is just too rich for my blood,
even in the best of conditions.”
And it’s not that copper’s a bad buy. Investors just tend to favor gold and silver.
Copper will never have that “precious metal/store-of-value component” that silver has, according to Scott Wright, an analyst at financial-services
company Zeal LLC. And individual investors won’t stockpile copper, and central banks won’t be buying copper like they do silver.