Is copper’s surge in price a positive sign for investors?

Concerns over the UK economy aside, the FTSE 100 has held up strongly, in part thanks to the performance of the global economy. With the vast majority of FTSE 100 companies being overseas earners, the fortunes of the FTSE 100 are tied with those of the global economy.

So, it should come as welcome news that copper – one of the key barometers of the health of the global economy – has been rallying of late. Prices surged to the highest levels seen since 2014 on Tuesday (8 August), while copper futures for September delivery closed at their highest level since May 2015 on the Comex division of the New York Mercantile Exchange.

This is part of a broader trend, with the price of the red metal up by nearly 17 per cent this year. And this, it would seem, is a positive sign for the global economy and by extension the UK stock market, which since bottoming out following the financial crisis in March 2009 has enjoyed an eight-year long bull run.

-What's worrying investors? Five threats that could derail the bull market

Russ Mould, investment director at AJ Bell, noted back in April that ‘a sustained increase in copper prices would help to reaffirm investors’ faith that the reflation trade which has dominated since the UK Brexit and US Presidential votes remains the right narrative to follow.’

In particular, demand in China has picked up. Although customs figures from China showed that copper imports in July remained flat on June levels, they were up by 8.3 per cent compared to July 2016.

According to Jason Hollands, managing director of Tilney Bestinvest, China is the world’s biggest consumer of base metal prices and so is the key driver of the prices of copper and many other raw materials. He adds: ‘The recent rally in copper has been driven by Chinese economic data releases which have largely been better than expected.’

Adrian Lowcock, investment director of Architas, made a similar point, saying that ‘the price of copper is still largely driven by demand in China.’ And with Chinese authorities doing all they can to avoid volatility in sectors of their economy that rely heavily on copper use, demand should hold for now.

At the same time, China’s plans to curb scrap metal imports have also helped boost the value of copper. The country, says Hollands, aims ‘to implement curbs next year on the imports of machinery waste for the purposes of scrap metal, which has led to expectations of tighter supply.’

Hollands, however, adds: ‘Although bullishness has been boosted by a potential ban on certain metal scrap imports in China that might constrain supply, it is also the case two of the world’s largest copper mines (Escondida in Chile and Grasberg in Indonesia) have recently resolved strikes and other issues that had led to supply being constrained, so supply could well pick up.’

In addition, a weaker dollar has also boosted prices. Another thing to bear in mind is that August is typically a quiet month for the copper market, so prices may be moving on low trading volumes.

How to gain exposure to copper

What does this mean for investors? Copper is a highly specialist investment and extremely volatile, but for those who have a stomach for risk the easiest way for investors to get in on the action is through exchange traded funds (ETFs) that track the price of copper. iPath Bloomberg Copper Subindex Total Return ETN is among the most popular.

However, as Hollands notes: ‘I would caution investors trying to jump on the back of a horse that has already bolted - a lot of bullish sentiment is now loaded into prices on the back of data already in the public domain.

’Copper, while on the up now, is still very volatile. Laith Khalaf, a senior analyst at Hargreaves Lansdown describes the commodity business as ‘notoriously fickle.’

‘I would suggest,’ noted Lowcock, ‘investors avoid going for individual commodities and consider diversified funds such as JP Morgan Natural Resources fund.’

Keep up to date with all the latest personal finance news and investment tips by signing up to our newsletter. Email subscribers will also receive a free print copy of Money Observer magazine.

Subscribe to Money Observer Magazine

Be the first to receive expert investment news and analysis of shares, funds, regions and strategies we expect to deliver top returns, plus free access to the digital issues on your desktop or via the Money Observer App.

Subscribe now

Add new comment