IVPAF - COPX: High Risk Poor Reward
2024-07-16 06:06:51 ET
Summary
- Global X Copper Miners ETF has underperformed the copper price and the majority of mining companies.
- Increased electrification is driving copper demand, but China's real estate decline hinders overall demand.
- Copper mining companies do not appear to be good earnings compounders, given the volatile cash flow nature.
- The ETF does not look to offer a suitable risk-reward balance.
Introduction
Increased electrification is the primary outcome of the energy transition, climate change, and AI data center demand, and the raw material in greatest use to meet electrification is copper. However, the demand drivers of copper are not linear due to China's real estate construction decline, which acts as a significant counterbalance. China is still over 50% of global copper demand and real estate construction was around 20%, thus this sector's decline is a drag to overall demand. At some point, residential real estate demand should be outweighed by the many other drivers, but this is a slow-moving train. On the supply side, mining companies have seen the cost and time frame to add capacity move to higher levels while managements have implemented investment and return discipline, which is resulting in a slow or lower supply build-up. The end result could be a gradual copper price gain over the long term, mixed in with substantial day-to-day volatility as most commodities. Given this scenario, I studied the Global X Copper Miners ETF ( COPX ) to gauge its suitability and came away disappointed....
COPX: High Risk, Poor Reward