Supply Concerns Emerge For Copper Miners ETFs

As measured by the iPath B Bloomberg Copper Total Return ETN JJC, copper is doing pretty well this year. That exchange traded note is up 8.7 percent year to date.

Some copper miners exchange traded funds are outperforming JJC, but those gains could be capped by concerns of excess supply.

What Happened

The Global X Copper Miners ETF COPX, which turns nine years old in a couple of weeks, is higher by nearly 17 percent year to date. COPX follows the Solactive Global Copper Miners Total Return Index.

While China remains the elephant in the copper room and is expected to continue driving demand for the red metal, the copper supply deficit is expected to dwindle.

“The increased copper supply pipeline of brownfield expansions and greenfield projects will eliminate any material market deficit in the medium term,” Fitch Ratings and CRU say. “China will remain a key driver for demand growth, while electric vehicles will become a significant factor in the long term. In the absence of additional investments, CRU expects a deficit to re-emerge in the long term.”

Why It's Important

COPX holds 31 stocks with an average market value of $7.71 billion, indicating that this fund tilts toward smaller companies. That, along with the ETF's heavy exposure to ex-U.S. stocks can lead to some increased volatility. Canadian, Australia and Chinese miners combine for about 53 percent of COPX's geographic exposure, in part explaining the fund's annualized volatility of more than 31 percent, according to issuer data.

“The medium-term copper supply outlook has increased and CRU expects an increase of more than 1 million tonnes in committed mine supply by the early 2020s from last year's expectations,” according to Fitch. “Higher copper prices of about USD7,000 a tonne in the second half of 2017 and the first half 2018 led to advancement of existing mine projects and increased exploration of new ones. This resulted in a growing committed mine production and an increased project pipeline.”

What's Next

While COPX has rallied in impressive fashion this year, the copper miners fund still needs to gain another 23.27 percent to reclaim its 52-week high. That could be a tall order against the backdrop of rising copper supply.

Additionally, COPX faces technical resistance around $22.50 and $23.50. The fund closed Wednesday at $21.40.

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