JJCTF: Weakness Out Of Sync With The Refined Copper Market Deficit – iPath Bloomberg Copper Subindex Total Return ETN (:JJCTF)

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Investment case

The iPath Bloomberg Copper Subindex Total Return ETN (OTCPK:JJCTF) has been broadly flat on the year, despite a tight fundamental backdrop for the global refined copper market. While the WBMS shows a refined copper market in deficit to the tune of 125,000 tonnes in the first eight months of the year, the marked decline in global copper visible inventories since September suggests that the deficit has deepened further.

This tight fundamental backdrop is not captured by speculative flows, since the speculative community has increased markedly its net short position in copper since the start of the year, as a result of the global economic slowdown and the trade dispute.

Because we believe that the market’s focus will eventually shift from macro uncertainty to micro positivity, we expect a reversal in the excessively short spec positioning, which should produce a sharp short-covering rally in the final months of the year and beyond.

We are therefore firmly constructive on our outlook for copper prices and JJCTF. Our Q4-19 target is set at $32/share, a 12% appreciation from the current level.

Source: Trading View, Orchid Research

About JJCTF

For investors seeking exposure to the fluctuations of copper prices, the iPath Bloomberg Copper Subindex Total Return ETN 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

Tight fundamental backdrop

According to the latest statistics from the World Bureau of Metals Statistics, the global refined copper market was in a deficit of 125,000 tonnes in the first eight months of 2019 (representing nearly 1% of global consumption), after a deficit of 269,000 tonnes in 2018.

Source: WBMS, Orchid Research

World mine production over January-August totalled 13.41 million tonnes, a 0.5% YoY increase.

Global refined production over January-August reached 15.47 million tonnes, a 2% YoY decline, driven by significant decreases in India (88,000 tonnes) and in Chile (206,000 tonnes).

Global refined apparent consumption in the first eight months of the year recorded 15.47 million tonnes, a 2% YoY contraction. Chinese apparent demand dropped 3.3% YoY, and European demand dropped by an even larger 4.4% YoY.

Clearly, the tightness of the global refined copper market stems from tight supply dynamics. The contraction in global mine production has tightened the concentrate market, evident in the sharp decline in spot TC/RCs this year (which incidentally fell to their lowest since 2012), which in turn has tightened refined production.

Refined market deficit likely to have deepened further since September

Considering the marked decline in global visible inventories since September, we argue that the deficit in the global refined copper market has deepened further.

Source: Bloomberg, Orchid Research

Combined, global copper visible stocks (on-exchange: LME, SHFE, COMEX; off-exchange: Shanghai-bonded copper stocks) have tumbled by 141,000 tonnes or 16% since August 30. They are at their lowest level since October 2009, when the copper price was 11% above its current level.

The marked drawdown in exchange inventories since late Q3 suggests tighter refined market conditions, driven by either tighter refined output or firmer demand. The tightness seems to come from China considering that physical premiums have increased markedly there, and not so much in other regions like Europe or the US. In all likelihood, this tight fundamental backdrop should exact a firmer copper price and thus a firmer JJCTF.

Tight fundamental backdrop hidden by substantial speculative selling

The weak price environment is, in our view, the result of speculative flows, which have captured the macro uncertainty and not the fundamentals.

To gauge speculative activity in the copper market, we analyse non-commercials’ positions in Comex copper, as the Comex is where most speculators are active in the copper market and where data are reported since 1989 by the CFTC and reliable.

Source: CFTC, Orchid Research

As the chart shows above, speculators have liquidated the equivalent of ~428,00 tonnes of copper since the start of the year, pushing the net spec length to a historical low (both in terms of contracts and % of open interest).

This wave of speculative selling has largely hidden the deficit in the global refined copper market, preventing copper prices from rising meaningfully.

However, we argue that the excessively net short position held by the speculative community is unlikely to prevail ad infinitum. In this context, we view the likelihood of a sharp short-covering rally elevated in Q4 and beyond.

Closing thoughts

A mean-reversion in copper’s speculative positioning would result in substantial upward pressure in copper prices. The chart above shows us that the majority of financial players is approaching the red metal from the short side, overlooking the inherently tight nature of the refined copper market. This myopia is unlikely to persist for too long, in our view.

We are therefore firmly constructive on our outlook for copper prices and JJCTF. Our Q4-19 target is set at $32/share, a 12% appreciation from the 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.

2019-10-20 18:29:00

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