Short Ideas

[gfp927z]

>>> Time to Short Copper: 5 ETFs to Play (or Avoid) the Trend


May 25, 2011

Insider Monkey


https://seekingalpha.com/article/271752-time-to-short-copper-5-etfs-to-play-or-avoid-the-trend


The precious metals have been on a run since early 2009. Gold and silver had approached their historic highs as investors had few alternatives against Fed's inflationary policies. Following these two, copper has also been a profitable commodity for the investors.

By the last quarter of 2008, with the effects of the economical crisis, we had seen the lowest copper price of the last three years at around US$2,900/MT. That proved to be temporary. Copper prices reached its peak level of US$10,148/MT on February 14, 2011.

When we look at the annual cash seller and settlement averages of the copper prices, there has been an increase of 230% between the years 2004-2011. The major price change was between 2004-2007, when the average annual copper price jumped from US$2,864.9/MT to US$7,118.5/MT. Between 2008 and 2011 the rally lost pace as the copper price moved from US$7,000/MT level to US$9,500/MT corresponding to an increase of 36%.

Since mid February copper prices went down by 10%. Increasing copper stocks in the LME warehouses (20% higher compared to last year) and the upcoming summer season in the northern hemisphere, when the industrial consumption decreases, may support the decline in copper price.

We believe copper prices will decline further over the next three months. Investors can speculate on a decline by shorting the following ETFs:

Global X's Copper Miners ETF (NYSEARCA:COPX): COPX invests in copper miners like Inmet Mining Corp. (IEMMF), First Quantum Minerals (OTCPK:FQVLF) and Jiangxi Copper Company Ltd. (OTCPK:JIAXF). It went below $12 last summer and currently trades around $19.

iShares MSCI Chile Index (BATS:ECH): Chile is the world's largest copper producer in the world accounting for nearly 33% of total global copper production. A decline in copper prices will affect ECH negatively.

iPath Dow Jones Copper Index ETN (NYSEARCA:JJC): A pure copper player which seeks to track the performance of copper futures contracts. JJC was below $40 last summer and currently trades around $55.

There is another side to this story. As being a non-ferrous metal, aluminum has similar characteristics as copper. But copper is often preferred over aluminum in the industry due to its better performance. (Especially in cable and wire production). However, when we take a look at the market in an economical perspective, the price difference between aluminum and copper has increased dramatically. This remarkable difference between the two base metals (copper costs almost three times of aluminum) leads many manufacturers to change their production from copper based products to aluminum-based ones. We expect this trend to strengthen and support aluminum prices. An increase in aluminum demand and a decline in copper demand will put some pressure on copper prices.

Investors should consider buying the following stocks to hedge their copper shorts:

Global X Aluminum (ALUM): This fund gives direct equity exposure to a global list of aluminum producers.

iPath DJ-UBS Aluminum ETN (NYSEARCA:JJU-OLD) This is an exchange traded note (ETN) which gives exposure to a basket of aluminum futures. It lost 10% of its value in May, so this may be a good time to buy.

<<<