Exchange traded funds that track copper, a leading global economic indicator, could be under pressure as problems centered around China’s lending rates and slowing economic growth could weaken copper demand.
According to a Boost ETP, a European ETF provider known for its leveraged products, China, the world’s largest consumer of copper, is experiencing tensions over its interbank lending market. [China ETFs Weak on Credit Jitters, Economy]
“Spiking SHIBOR (China’s version of LIBOR) in the last two weeks are reinforcing investors worries of China’s credit fuelled industrial expansion,” Boost ETP said. “As loans are being reigned in, base metals producers and traders are likely to feel the squeeze, putting pressure on them to turnover inventories faster and stockpile less.”
China has been stockpiling copper for years in light of strong year-over-year economic growth. As of April, the stock levels were at 182,000 tonnes, or 54% above the 5-year historic average.
Furthermore, the slowing Chinese economy, which is now expanding at around 7.7%, compared to the an average of 9% to 10% over the past five years, is also weighing on copper and industrial commodity prices.
“As the Chinese economy cycle is now entering a slowdown, it is the oversupply, more so than a demand fallout, which has instigated a renewed build-up in short positiosn in copper,” Boost ETP added. “Copper prices have been falling on the back of this.”
Boost ETP also believes that the current weakness in copper is largely attributed to poorer fundamental factors, whereas prior price dips were tied to bearish speculative positions by hedge funds and active traders.
Traders can access copper price movements through the exchange traded note, iPath Dow Jones-UBS Copper Subindex Total Return ETN (NYSEArca: JJC). JJC is down 15.6% year-to-date.
For more information on copper, visit our copper category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.