Investment case

Our initial bullish view on the iPath DJ-UBS Copper Total Return Sub-Index ETN (OTCPK:JJCTF), which tracks the performance of copper prices, has been abruptly defied by the COVID-19 crisis.

The substantial sell-off in JJCTF in Q1 was driven by both negative macro and fundamental factors at play. The COVID-19 outbreak triggered a massive wave of deleveraging, pushing all commodity prices lower. Copper’s fundamentals deteriorated because the abrupt halt of economic activity in China resulted in a massive decline in consumption.

JJCTF dropped to $20/share on April 1, which was the max downside target we had envisioned in our latest update, before rebounding since then.

Indeed, JJCTF has enjoyed a solid recovery since the start of Q2, driven by a combination of positive macro, fundamental, and seasonal factors at play. In addition to a return to risk-on mode, visible inventories, especially in China, have declined substantially so far this quarter.

Although the refined copper market is a more bearish posture than pre-COVID-19, we expect the rebound in JJCTF to continue because financial conditions are due to remain easy, positioning remains light, and fundamental indicators are strengthening at a stronger pace than initially expected by the market.

We expect JJCTF to hit $32/share in Q3-20.

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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 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.

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

Source: iPath

Large surplus in Q1

The COVID-19 outbreak resulted in a sharp contraction in economic activity in China in Q1, thereby triggering a marked decline in refined copper consumption. Because China consumes around 50% of global refined supply, the impact on the global refined market is substantial.

According to the CRU, the global refined copper market could post a surplus of 837 kt this year, without taking price-driven cutbacks into account. This is a substantial surplus, which is likely to cap the upside in prices in the longer run.

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Source: CRU

The large surplus is reflected in the noticeable increase in visible inventories in Q1.

Source: Bloomberg, Orchid Research

The weakness in the refined copper market was also reflected in the depressed physical market due to subdued physical consumption, especially in the world ex-China.

Fundamental indicators have tightened since the start of Q2

Encouragingly, copper inventories have begun to drop since the start of Q2 and physical premiums in China have increased strongly. In our view, this suggests that the Chinese refined copper market has tightened at a stronger pace than initially expected, which is due to a rebound in economic activity as the country was the first to ease lockdown measures.

Should other major economies follow the “Chinese” path, refined market conditions could also tighten in the rest of the world, supporting further the uptrend in JJCTF.

The speculative community has normalized its excess bearish positioning

After turning extremely bearish on copper during the apex of the COVID-19 crisis, the speculative community has normalized its spec positioning since then.

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Source: CFTC, Orchid Research

Non-commercials are now net long copper to the tune of 7% of the open interest. Given the solid recovery in copper prices, the super-easy liquidity conditions thanks to massive policy support from the Fed, and the tighter fundamental indicators, we believe that the speculative community could become even “longer” CME copper.

This would naturally push copper prices higher, which, in turn, would push JJCTF higher.

Closing thoughts

We believe that the rebound in JJCTF is not created out of “thin air”. Instead, we argue that refined market conditions have already begun to tighten since the start of Q2, which is principally due to a rebound in economic activity in China, pushing refined copper consumption in the country higher.

We think that other major economies could follow the same path, meaning that refined market conditions could start tightening in the US and Europe, which account for a combined 20% of global refined demand.

If financial conditions remain “super-easy” thanks to the Fed and other major central banks, which appear committed to foster the economic recovery at all costs, we think that the rebound in JJCTF will continue next quarter.

For Q3-20, we envisage a max target of $32/share for JJCTF.

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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.

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