Copper prices (OTCPK:JJCTF) have come under intense downward pressure since the escalation of the US-China trade war. However, we believe that from a purely fundamental perspective, the refined copper market has tightened since the start of the year, despite the small surplus recorded in January and February. As bearish news is already priced in, we believe that the sell-off in JJCTF is overdone and JJCTF is ripe for a rebound in the coming months.
Source: Seeking Alpha
JJCTF in a nutshell
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The International Copper Study Group (ICSG) has updated its statistics on copper supply and demand. In this brief note, we highlight the fundamental picture estimated by the ICSG and analyse stock flows to assess the more recent changes in copper’s fundamental dynamics.
According to the latest publication by the ICSG, the refined copper market switched to a surplus of 74,000 tonnes in February after recording a deficit of 33,000 tonnes in January.
This pushed the January-February balance to a surplus of 41,000 tonnes, which is in line with the 43,000-tonne surplus posted in the corresponding period of 2018.
Because Q1 is a seasonally weak demand period, it is not surprising to see a surplus in the refined copper market over this period. The surplus is very small because it represents only 1% of global consumption.
Mine production reached at 3.187 million tonnes in Jan-Feb 2019, down by 59,000 tonnes or 2% from the same period of last year.
According to the ICSG, “although a few countries experienced growth, this was largely offset by declines in two major producing countries, namely Chile and Indonesia.”
Mine production in Chile dropped by 57,000 tonnes or 6% while Indonesian mine output tumbled 61,000 tonnes of 50%.
Chile is the world largest mine producing country, accounting for 27% of global mine production. Indonesia represents only 2% of global mine production.
While the decline in Chilean mine production was driven by a lower quality of ore grades, significant drop in Indonesian mine production was caused by the transition of two major mines to different ore zones.
Implications for JJCTF:
The fall in global mine production should tighten the concentrate market, which is already tight, which in turn will tighten the refined market, push LME copper prices up, and lift the value of JJCTF
According to the ICSG, “On a regional basis, refined output is estimated to have increased Asia (2%) and in Oceania (25%) while declining in Africa (-8%),in the Americas (-8%) and remaining essentially unchanged in Europe.”
China was the largest contributor to global refined production growth, with an increase of 97,000 tonnes or 9% YoY. This was the result of the continued expansion in its capacity.
The largest declines were seen in 1)India, whose refined production tumbled by 64,000 tonnes or 45% YoY, as a result of the shutdown of Vedanta’s Tuticorin smelter, and 2)Chile, whose refined production dropped 58,000 tonnes or 15% YoY, due to temporary shutdowns amid new environment regulations.
Implications for JJCTF:
The decline in global refined production so far this year will tighten the refined copper market, resulting in a stronger drawdown in exchange inventories, tighter spreads, stronger physical premiums, and therefore stronger copper prices, which will benefit JJCTF.
Refined apparent usage totalled 3.812 million tonnes in Jan-Feb 2019, which was marginally down by 14,000 tonnes or 0.4% YoY from the same period of last year.
The largest contributor to growth was China, with a YoY increase of 74,000 tonnes or 4%, thanks to a solid growth of 2.5% YoY in domestic imports.
However, this was offset by marked declines in Europe (-35,000 tonnes or -7% YoY), Taiwan (-14,000 tonnes or -18% YoY), Turkey (-13,000 tonnes or -15% YoY), and the US (-9,000 tonnes or -3% YoY).
Implications for JJCTF:
Demand for refined copper has been stable so far this year. However, the escalation of the US-China trade war could pose downside risks to the global economic outlook and demand for copper could be negatively impacted in the months ahead. If this were the case, the refined copper market would become less tight and copper prices would come under downward pressure, thereby undermining JJCTF’s performance.
How has the balance of the refined copper market evolved since March?
To answer this question, we look at the changes in exchange inventories. If global exchange inventories have decreased, it tends to point to tighter refined market conditions (ie, more demand and/or less supply). Conversely, if global exchange inventories have increased, it tends to imply looser refined market conditions (ie, more demand and/or less supply).
Since March, LME copper stocks have increased by ~60,000 tonnes or 51%, SHFE stocks have dropped by ~55,000 tonnes or 24%, and COMEX stocks have declined by 23,000 tonnes or 45%. On net, global exchange inventories have dropped modestly by 15,000 tonnes or 4%.
This therefore means that the refined copper market has tightened since the latest estimates of the ICSG, which should be supportive of copper prices and thus JJCTF.
From a purely fundamental perspective, we believe that the refined copper market has tightened since the start of the year, which is conducive to firmer copper prices and a stronger JJCTF. The recent sell-off in copper prices is more the result of a challenging macro backdrop, prompting market participants to formulate more bearish expectations on the copper demand outlook. As bearish news is already priced in, we believe that JJTF is ripe for a recovery in the coming months.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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