CPER - Copper And The CPER ETF And JJC ETN

Summary

• Copper rallies in early 2023: The “new oil” is back in bullish mode as stockpiles decline and Chinese demand could make a significant comeback.
• The dollar and interest rates have supported the nonferrous metal in early 2023.
• Requirements for green energy initiatives could push the nonferrous metal to new record highs.
• CPER and JJC are the copper ETF and ETN products that follow copper higher and lower.

Doctor Copper is a commodity many market participants believe has a Ph.D. in economics as it's a leading indicator of the health and wellbeing of the worldwide economy. For many years, copper was a bellwether because of its role in infrastructure building. However, copper has become a critical requirement for green energy initiatives, addressing climate change and decarbonization.

Nearby COMEX copper futures prices reached a record $5.01 in March 2022 and corrected to a low of $3.15 per pound in July 2022, a 37.1% decline. In late January 2023, copper is back above the midpoint of the 2022 trading range at the $4.20 level on January 31.

The United States Copper Index Fund ( CPER ) and iPath Series B Bloomberg Copper Subindex Total Return ETN ( JJC ) follow copper futures prices higher and lower.

A rally from the July 2022 low to over $4 in early 2023

Over four months, from March through July 2022, copper plunged 37.1%. However, the red nonferrous metal found a bottom, and by the end of December, the price was over the $3.80 level.

The monthly chart highlights the rally continued throughout January, pushing the nearby March COMEX futures contract to a $4.3145 high, 37% above the July low. However, the market needs to climb a lot more than 37% to recover the losses from the 2022 record peak. On February 1, copper futures were trading just over the $4.10 per pound level, and the base metal remained in a bullish trend after the correction.

Energy initiatives and China are bullish for copper- Stockpiles are dropping

In 2021, Goldman Sachs called copper " the new oil " because of its requirements for green energy initiatives. In its initial report, Goldman's forecast was for the base metal to rise to the $15,000 per ton level by 2025. In its latest reports , Goldman's analysts are calling for an average of $9,750 per ton in 2023, increasing to $12,000 per ton in 2024. At the $4.1165 level, LME three-month forward prices are around the $9,000 per ton level.

EVs require more than twice the amount of copper than gasoline-powered cars.

The growth of the EV market is putting pressure on copper's demand side fundamentals as the supply side is not keeping pace.

Meanwhile, China remains the world's leading copper consumer, and as COVID-19 lockdowns end, the potential for a significant increase in copper demand is on the horizon. Some of the world's leading copper mining companies have warned that the cyclical nature of commodity markets means producers must keep their balance sheets strong, rewarding investors and tempering their enthusiasm for aggressive growth projects. Freeport-McMoRan's CEO , Richard Adkerson, recently said, " the world is becoming more electrified everywhere you look ," which is leading to a " new era of (copper) demand ."

While miners struggle to balance increasing production while providing a return for investors, copper stockpiles are falling.

The five-year chart shows at 75,225 metric tons on January 31 - copper inventories at the world's leading nonferrous metals exchange have declined to a multi-year low.

The trend in sixty-day COMEX warehouse stocks shows a decline from around 37,500 tons in late November 2022 to below 30,000 on January 31. While dominant market participants can manipulate stockpile data, the demand-side evidence points to the inventories as a bullish factor for the metal's price in early 2023.

Action in the U.S. dollar and bond market support copper

While EV, wind turbine, and rising Chinese demand are bullish for copper's price, the recent activity in the U.S. dollar index and U.S. bond market only exacerbate the metal's bullish case.

After rising to the highest level in two decades at 114.745 in September 2022, the dollar index ran out of upside steam and fell below support at 103.96 in early 2023. Copper was below the $3.30 per pound level when the dollar index peaked.

The U.S. 30-Year Treasury bond futures fell to 117-19 in October 2022, the lowest level since February 2011. Copper futures were under $3.40 per pound as the bonds reached lows and interest rates peaked. Bonds have recovered to over the 130 level in early February 2023.

A strong dollar and high interest rates are a toxic bearish cocktail for commodities prices, and copper is no exception as a leader of the asset class. The bond rally and decline in the dollar index have had the opposite impact, supporting copper prices over the past month.

The four reasons why new highs could be on the horizon

At least four factors support copper in early 2023:

• Markets tend to overshoot analyst estimates on the up and downsides as speculators flock to a trending market. Copper's path of least resistance is higher in early 2023.
• Production problems continue to plague the copper market. Chile and Peru are the world's leading producing countries. Peru has experienced a series of mining conflicts over the past two years as protests at Glencore's ( OTCPK:GLNCY ) Antapaccay Mine, Southern Copper's (SCCO) Cuajone, and Chinese MMG's Las Bambas mines threaten to block access to billions of copper production. Las Bambas is Peru's fourth-largest copper mine and the world's ninth-leading producer. Meanwhile, the Democratic Republic of Congo, another top copper-producing country, is criticizing its deal with China, which could be a production roadblock. As demand rises, supply-side problems are intensifying.
• The decline in worldwide inventories is a barometer for copper prices. Copper is the leading base metal trading on the London Metal Exchange. Most base metals are trending higher, with stockpiles at the lowest level in decades, which signifies the rising demand for industrial metals.
• Global inflation remains at multi-year highs, despite the hawkish central bank policies. Higher inflation increases production costs, putting upward pressure on prices. Moreover, the war in Ukraine and the bifurcation between the world's nuclear powers cause price distortions in the raw materials asset class. Copper is one of the many commodities at the center of the geopolitical stage as the U.S. and Europe compete with China for supplies.

Meanwhile, the trend is always your best friend in all markets. Copper's path of least resistance turned from bullish to bearish after the March 2022 $5.01 record high. After finding a significant bottom at in July, copper is now above the midpoint of the 2022 range, which is $4.085 per pound, and the trend has returned to a bullish path.

CPER and JJC follow copper prices- An update on analysis from late October 2022

In late October 2022, I analyzed the performances of the United States Copper Index Fund ( CPER ) and iPath Series B Bloomberg Copper Subindex Total Return ETN ( JJC ) on Seeking Alpha . In that article, I wrote, " The ETF and ETN products did an excellent job tracking copper prices. While CPER is more expensive from an expense ratio perspective, it offers more liquidity than JJC. I view the ETF and ETN as acceptable products, given their performance since the 2020 lows. " On October 24, 2022, CPER was at the $20.48 level, with JJC at $17.05.

Since then, nearby COMEX copper futures rallied from $3.3950 per pound to $4.1165, a 21.3% rise.

At $24.98, CPER has moved 21.97% to the upside since October 24.

JJC at $20.86 has increased 22.3% since October 24.JJC slightly outperformed CPER, while the ETN and ETF posted a marginally higher percentage gain than the nearby COMEX copper futures.

• At $20.86, JJC had $70.480 million in assets under management. JJC trades an average of 42,074 shares daily and charges a 0.45% management fee.
• At $24.98, CPER had $161.677 million in assets under management. CPER trades an average of 256,063 shares daily and charges a 0.88% management fee.

While JJC outperformed CPER, CPER remains a more liquid product. However, CPER's management fee is almost twice JJC's. Choosing between the two is a coin toss as both provide an excellent alternative to the futures market with commensurate performance.

The case for higher copper prices remains compelling as we move into 2023's second month. I expect the trend of higher lows and higher highs to continue.

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