Home/Blog/Trading Ideas/Are We Stuck With Too Much Copper?

Are We Stuck With Too Much Copper?

20 September 2012 in Trading Ideas

Investing in commodities has resulted in a pretty good run over the past month, especially in precious and industrial base metals.

The surge in gold prices has been well-documented, as it usually is, but the rise in the price of copper also has been huge, outperforming base metals like nickel and aluminum by a wide margin since the beginning of June. (The Dr. Copper motif is up 11.2% in the past month).

Why? When considering the recent rising demand for copper, one generally turns to China, which uses more of the metal than any other country – its consumption has grown to more than one-third of the world’s total in 2012.

That fact brings a heightened relevance to a Wall Street Journal article from Sept. 10 that finds another kind of copper growth in China – more of it is sitting around on warehouse floors.

As the Journal puts it, these huge stockpiles of copper have thrown a wrench into the traditional take of analysts and investors, who generally expect stockpiles of copper to wane during summers due to the seasonally high demand from air-conditioner makers and power-grid builders.

Understandably, the bearish view for the fate of copper prices is that growing piles of copper suggest that Chinese demand is waning – not a great sign for the global economy or a continued rally in copper.

However, others see that potential weakness as a strength. If China’s economy is truly this weak, it sets the stage for the Chinese government to step in with more stimulus. Those optimists are betting that China’s support for its housing and power markets could prop up copper prices.

And, as the Journal notes, the International Copper Studies Group still expects a 237,000-ton deficit of refined copper in the world this year.

In addition, one analyst quoted in the Journal’s story believes even a couple of months of better demand would change the entire industry outlook. The question is whether investors will become increasingly jittery as they wait for further confirmation of sustained demand.

Performance of motifs are for informational purposes only and are based on performance of a motif for at least the previous month. Performance not based on results you could expect to achieve. See how we calculate returns.