JJCTF: Rally Driven By Tighter Refined Market Conditions Amid A Friendlier Macro Environment – iPath Bloomberg Copper Subindex Total Return ETN (:JJCTF)


Investment case

The iPath DJ-UBS Copper Total Return Sub-Index ETN (OTCPK:JJCTF), which tracks the performance of copper prices, has gained around 4% since our last publication, corroborating our constructive outlook for year-end.

Although we believe that the chief driver behind JJCTF strength has been the increased refined market tightness, we are willing to admit that the notable improvement in macro sentiment, owing to better trade dynamics and signs of global trade stabilization, has also contributed to the rebound in JJCTF.

With both the macro and the fundamentals playing in favour of the red metal, we strongly believe that JJCTF will trade at a much higher level by year-end. Our Q4-19 target is maintained at $32/share, an 8% appreciation from in current level.

Source: Trading View, Orchid Research


For investors seeking exposure to the fluctuations of copper prices, the iPath DJ-UBS Copper Total Return Sub-Index ETN (OTCPK:JJCTF) is an interesting investment vehicle.

The fund summary for JJCTF is as follows:

The iPath® Bloomberg Copper Subindex Total ReturnSM ETN is designed to provide exposure to the Bloomberg Copper Subindex Total ReturnSM (the “Index”). The Index reflects the returns that are potentially available through an unleveraged investment in the futures contracts on copper.

Its expense ratio is 0.75% per annum.

JJCTF tracks copper prices well, as the chart comparing the ETN and the Index illustrates below:

Source: iPath

Its expense ratio is 0.75% per annum.

Refined copper market in deficit

As we discussed in our previous note, the fundamental backdrop of the global refined copper market has tightened noticeably since 2018.

Source: WBMS, Orchid Research

This is primarily the result of mine supply tightness, which is expected to contract by 2% this year according to the ICSG, which in turn has tightened the global concentrate market, evident in the slump in TC/RCs to their lowest since 2012. As a result, smelters have been forced to constrain their refined copper output, principally in the world outside of China. The ICSG estimates that global refined production growth will slow to 0.6% this year from 2.4% in 2018.

Global visible copper inventories at their lowest since 2011

The deficit in the refined market has tighten refined market conditions, proxied by visible inventories (on- and off-exchange). Global copper inventories are at their lowest level since 2011, down around 19.5% from a year ago. The drawdown of global inventories has accelerated since the start of Q4, as the chart below shows.

Source: Bloomberg, Orchid Research

Spec normalization under way

The speculative community has started to normalize its excessively negative positioning since late Q3.

Source: CFTC, Orchid Research

The intense wave of spec selling over the first eight months of the year was the result of 1)growing fears over a slowdown in economic growth due to escalating trade frictions and 2)a noticeable increase in global visible inventories (which has been interpreted as a sign of looser refined market conditions).

On the first point, we believe that growth fears have been exaggerated.

As UBS Chief Economist of UBS Global Wealth Management Paul Donovan noted in a recent note (Reality or nothing?, November 8, 2019):

The gap between manufacturing sentiment data and reality is the widest it has been for several years. Manufacturing sentiment is suggesting a depressed situation. In the real world the global economy has slowed below trend, but not far below trend. Sentiment is overreacting.

The global news cycle is focused on problems with trade. There are real economic problems from the trade conflict. However the media may sensationalize these problems. Sensationalism hurts sentiment. Survey responses can be hurt by negative news coverage.

On the second point, we argue that the large increase in global visible copper inventories was not exclusively due to a deterioration of the fundamentals; rather it reflected the forced liquidation of inventories (~100,000 tonnes) by Tewoo, one of the largest Chinese commodity traders, due to its financial troubles.

Given that 1)refined market conditions tighten noticeably and 2)macro sentiment has improved thanks to growing expectations for a partial US-China trade deal (“Phase one”) and a gradual de-escalation of trade frictions, we expect the speculative community to eventually become net long in Comex copper.

The upside for JJCTF is great is the months ahead

According to our calculations, the normalized net spec length in Comex copper (using a min-max normalization with a 5-year trailing average) is at -48%. This means that copper’s spec positioning is still stretched on the short side. The forthcoming normalization could result in marked upward pressure in copper prices, like in 2016, as we illustrate in the chart below.

Source: CFTC, Orchid Research

Closing thoughts

JJCTF has enjoyed some decent upward pressure since we wrote our last note on October 20, in line with our constructive price outlook. Although the improvement in macro dynamics has underpinned the recovery in JJCTF, we believe that the chief driver is the marked tightening of present fundamentals, which we proxy by global visible inventory flow.

With the spec positioning in Comex copper far from being normalized, we believe that the upside for JJCTF in the coming months remains significant.

Our Q4-19 target for JJCTF remains conservative at $32.00 per share, implying an 8% upside from in current level.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Our research has not been prepared in accordance with the legal requirements designed to promote the independence of investment research. Therefore, this material cannot be considered as investment research, a research recommendation, nor a personal recommendation or advice, for regulatory purposes.

2019-11-10 15:31:00

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