Record copper prices fail to register in ETFs

Cautious investors are holding back from copper ETCs despite the metal reaching record prices, according to providers.

Copper trading on the London Metal Exchange pushed past the $10,000 a tonne mark on Friday 4 February, reaching all-time highs of around $10,150 on Monday 7th.

Despite this ETF Securities, which launched the world's first physically-backed copper ETC in December, says it has not seen a significant spike in interest. The company's futures-based ETFS Copper hit its highest NAV since inception last Monday, but has not generated particularly high trading volumes.

Barclays' iPath DJ-UBS Copper Subindex TR ETN was also trading at its highest ever price on 7 February, but is showing volumes only slightly elevated from its average.

Copper's surge came on the back of US employment figures released in the previous week that showed manufacturing created 49,000 jobs in January. Copper is widely used in the industry and prices for the metal are highly correlated to the business cycle as well as broad economic conditions.

The situation eased back in the latter half of lastweek, with prices falling under $9,900 at the close on Thursday , following the announcement of higher interest rates from China's central bank. The shape of the term structure also suggests the current level of enthusiasm will be short-lived.  During the highs last Monday, three-month contracts were back at $9,920 and 15-months even cheaper at $9,705.

ETF Securities co-head of European sales Scott Thompson says he does not expect clients to invest in copper on the basis of "a few economic numbers" from the US. "My sense is that people are interested, but there are a lot of risks out there and before people buy into a recovery story they are going to wait for more figures."

Speaking at a recent multi-asset outlook conference, Deutsche Bank head of commodities research Daniel Brebner cited industrial metals as a good way of playing inflation. Brebner also pointed out the tendency of gold equities to underperform the precious metal's prices, suggesting that investors might look to commodity ETCs before funds such as the Global X Copper Miners ETF.

The instant dampening effect of China's announcement, however, highlights the changeability of the situation. Meanwhile the medium-term outlook is a complex combination of global economic recovery and fundamental industry drivers.

Morningstar recently raised its forecast for copper prices in 2011 and 2012 to reflect supply tightness and emerging market demand growth. At the same time though, the company scaled back its expectations for 2013 and beyond on the back of "dramatically more growth projects than we had expected".

Morningstar now believes that expansion plans within the industry are sufficient to bring copper prices back down closer to the long-term marginal cost of production. Senior analyst Daniel Rohr writes: "It is the obviousness of copper's attractiveness for the next couple of years that makes us less bullish in the years after that."

Physically-backed copper ETCs, already offered by ETF Securities but also hotly anticipated from JP Morgan, Deutsche Bank and iShares, have themselves been credited with the ability to cause the kind of price surge seen in the past few weeks.

Thompson points out that the flows seen so far do not bear out these fears. "Everyone expected the physical industrial metals to take off on day one. But that is not our client base; we deal with long-term, fairly traditional investors." He argues: "It is not ETF Securities in Europe who are putting in the $5m, $10m type of tickets."

Thompson says he expects it to take roughly six months for the level of interest in physical copper to crystallise properly. "There is a little bit of pent-up demand in a market like this, but when that is satisfied it then reverts back to fundamentals. The underlying market is so much bigger than an ETF that tracks it."