How to play the bull case for copper through ETFs

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Copper, traditionally a barometer of global economic health, has taken a breather after last month’s sky-high rally.
The London Metal Exchange (LME) copper price has retreated to about US$9,900 a tonne after hitting a nominal record high of $11,104.50 on May 20. Copper futures on the COMEX in New York have slid to about US$4.50 a pound from a peak of US$5.20.
Given the commodity’s strong, longer-term fundamentals, the pullback from recent enthusiasm could provide a buying opportunity, analysts say.
Exchange-traded funds (ETFs) that invest in equities and futures can be a way to play copper. Sprott Physical Copper Trust COP.UN-T, a closed-end fund that owns the metal, also launched last week.
Linda Ma, vice-president of ETFs and financial products research at National Bank Financial Markets in Toronto, says there have been strong inflows into copper ETFs for the first five months of this year.
In the U.S., inflows totalled US$751-million to boost assets to US$2.9-billion in five ETFs. In Canada, where there is only one copper ETF – Global X Copper Producers ETF COPP-T – inflows totalled $13-million to increase assets to $23-million.
“Investing in copper is a long game,” says Carlos Sanchez, director of commodities and asset management at CPM Group in New York.
“The short-term player can make decent amounts of profits on price swings, but there’s more certainty in the medium to longer term.”
The LME price for copper, which is used in everything from construction to electrical grids, climbed from US$7,856 a tonne last October, with the big spike from March to May this year.
Factors propelling the recent copper rally include the economies of the U.S., Europe and China faring “better than expected,” Mr. Sanchez says, as well as seasonal strength and some short covering in the market.
There were also supply disruptions, including the government-ordered shutdown of First Quantum Minerals Ltd.’s FM-T mine in Panama following protests over a tax deal signed last October.
Prices typically pull back on profit-taking, but copper is likely to move between US$9,500 and US$10,500 a tonne between now and September, Mr. Sanchez says.
The seasonal strength from the construction season in the northern hemisphere will then fade, and there tends to be reduced demand for base metals, including copper, he says.
Despite being more cautious over the next six months, he’s upbeat on copper over the medium to longer term.
“There’s potential for prices to rise toward US$12,000 a tonne by the end of 2026,” Mr. Sanchez says. The global economy should be faring better, while U.S. interest rates should fall later this year or next, he adds.
Unless escalating geopolitical tensions temper demand, “US$9,000 would be a good buying opportunity.”
China, which accounts for 50 per cent of global copper demand, is likely to see an improvement in its property market with the recent government stimulus package increasing demand for the metal, Mr. Sanchez says.
The longer-term bull case also stems from growing economies such as India, which he calls “the next huge story,” where investment in infrastructure, transportation and housing should increase.
Copper demand should also grow because of the energy transition to renewables, as the metal is needed for everything from solar panels to electric vehicles, Mr. Sanchez adds.
Still, Colin Hamilton, a commodities analyst for BMO Capital Markets Ltd., in London, England, says he believes the price of copper got ahead of fundamentals, and its recent high wasn’t justified.
“I would say US$9,500 a tonne would be the right price,” Mr. Hamilton says. “Shorter term, I’m a bit cautious. It doesn’t feel that economic growth is strong enough to support that ample run-up we saw in copper prices.”
But he’s bullish on the metal over the medium to longer term because he doesn’t expect supply to be able to meet demand.
It’s getting harder to build a copper mine due to political and environmental issues in different countries and capital-cost inflation, he says. “You have seen less capital put to work for [mine] expansion than in any previous cycle.”
BHP Group Ltd. BHP-N recently failed in its takeover bid for Anglo American PLC NGLOY-OTC to get its copper assets, but merger-and-acquisition activity will continue in the sector, he says.
Demand will also grow from the energy transition, he adds. “Electric vehicles are more copper-intensive than combustion engines, and renewable energy is more copper-intensive than fossil-fuel plants.”
Mr. Hamilton expects copper to trade in the US$10,000 to US$12,000 range in the medium to longer term.
If copper spikes to the US$15,000-level, copper buyers could look for substitutions, such as aluminum, which is a slightly inferior metal but can do the job, he says. “We have seen Chinese demand pull back a bit as prices have risen.”
Mr. Hamilton says he believes the recent rally was fuelled by sudden financial-market interest as shares of Nvidia Corp. NVDA-Q surged on rising demand for its artificial intelligence (AI) chips.
There was excitement around AI because it feeds on power from large data centres that typically use copper wiring, he says. “That question of how much copper goes into a data centre is probably the single question that has been posed most by clients in the past two months.”
Copper in data centres is a growth area, but it’s a small amount in a 24-million-tonne market, he says. “But we will need a lot of old-school spending on utility infrastructure to upgrade global electricity grids, and that will be copper-intensive.”
Although there could be more downside to the metal price, Mr. Hamilton says copper exposure is “one of those bottom-drawer things.”
“You always have it there, and you have to ride out the short-term cycles,” he says. “Longer term, the fundamentals are extremely robust.”
Investors can play the metal through a handful of copper-focused ETFs or broader commodity plays, says Ms. Ma of National Bank Financial Markets.
Mirae Asset Global Investments Co. Ltd. oversees two copper ETFs in North America, but they differ. Canada-listed Global X Copper Producers ETF is 74 per cent invested in domestic miners. U.S.-listed Global X Copper Miners ETF COPX-A is more global, she says. “It’s the biggest and most liquid copper ETF in the U.S.”
U.S.-listed Sprott Junior Copper Miners ETF COPJ-Q gives exposure to exploration and development companies, while iShares Copper and Metals Mining ETF ICOP-Q owns copper producers and metal ore miners.
Commodity ETFs should be used as a tactical play or considered a satellite investment making up no more than 5 to 10 per cent of a portfolio, Ms. Ma says. They also tend to be pricey, with management expense ratios in the 0.50- to 0.80-per-cent range.
Shorter-term traders or more sophisticated investors might want to consider United States Copper Index Fund CPER-A, which invests in copper futures, she adds.
Still, she prefers more broad-based commodity ETFs for copper exposure to reduce risk.
They include iShares S&P/TSX Global Base Metals Index ETF XBM-T, which is 39 per cent invested in copper miners, and BMO Equal Weight Global Base Metals Hedged to CAD Index ETF ZMT-T, which has an 18-per-cent copper weighting.
iShares S&P/TSX Energy Transition Materials Index ETF XETM-T also holds 25 per cent in copper miners. If investors want to play the transition to renewable energy instead of just base metals, this ETF could provide a solution, Ms. Ma says.
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