Copper Rebound in 2023 Bodes Well for This Base Metals ETF

Copper has suffered in 2022 like a majority of assets, but a brighter outlook in 2023 could see higher prices for the industrial metal. An additional catalyst could be the reopening of China’s economy.

The start of 2022 looked promising for copper with the S&P GSCI Copper Index rising to about 10% following Russia’s invasion of Ukraine. Since then, however, it has languished, with the index now looking at a 15% year-to-date drop.

“Copper — traditionally seen as a leading indicator of economic health — has unsurprisingly had a rough year,” a CNBC report said. “But analysts expect a resurgence in 2023, even as the global outlook remains highly uncertain.”

“Some of Wall Street’s biggest banks in recent weeks have suggested a combination of short-term supply tightness and long-term energy transition-related demand will push the red metal north from here,” the report added.

One of the banks harboring a rosy outlook for copper is Bank of America. Of course, the U.S. Federal Reserve scaling back on its rate hikes will be a major factor along with other macroeconomic events.

“Notwithstanding the macro headwinds, physical markets have remained tight, highlighting the lack of spare copper units available at present,” commodity strategist Michael Widmer said in Bank of America’s 2023 metals outlook report.^SG3J Chart

To get exposure to the copper rally, exchange traded fund (ETF) investors can opt for the Invesco DB Base Metals Fund (DBB). The ETF seeks to track changes, whether positive or negative, in the level of the DBIQ Optimum Yield Industrial Metals Index Excess Return™ plus the interest income from the fund’s holdings of primarily U.S. Treasury securities and money market income less the fund’s expenses.

The fund provides exposure to a variety of metals, giving investors a healthy dose of diversification. In terms of copper itself, the fund (as of December 16) gives investors about 33% exposure.

Rebound Could Hinge on China Reopening

As mentioned, China could be a major contributor to whether a copper rebound comes into fruition. Consuming over half of the world’s volume in 2021, China’s economic reopening could re-energize demand for global copper.

The country has been dealing with a surge in COVID-19 cases again, forcing government-mandated lockdowns. Now, China is easing its lockdown measures, which could give the economy a much-needed boost — a positive sign for copper demand.

“If China were to return its copper stock to consumption ratio to pre-2020 levels, that would imply as much as a 500kt boost to physical demand,” said metals strategist Nick Snowdown.

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