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China's Copper Pipe Dream

Written By Brian Hicks

Posted June 1, 2011

Where the heck are they going to use this stuff?

Copper's Snappy Comebackclick images to enlarge

I’m talking about copper today, and the reason I am talking about it is because my charts show the red metal ginning up one heck of a comeback.

Now some folks out there — particularly those of you who are obsessed with value-oriented statistics — might find this rally puzzling as all get out. After all, we have been told to expect a substantial global growth slowdown in copper usage in 2011…

As per the International Wrought Copper Council (IWCC), demand growth for copper is expected to drop from the torrid 16.4% average growth rate set between 2005 and 2010 to a mere 8.4% in 2011 and 2012.

For a while, a fair amount of that demand used to come from Stateside construction and manufacturing (think bloated McMansions made out of spit and staples, endless new Starbucks dispensaries, Cat tractors to be sold in China, India, and Brazil, and Cadillac Escalades that qualify for their own zip codes).

Housing Double Dips

By 2008 or so, we knew the U.S. economy was DOA. And while we did see a modest recovery for a while there, most of that was purchased wholesale by government borrowing. And now that the check has come due, this spurious growth is grinding to a halt.

A few tidbits attesting to same…

According to the latest reading of the S&P/Case Schiller 20-City Index, U.S. home prices have “double-dipped” to their lowest level since 2002. The wags have been using the term “worst-since-1929” pretty freely since things began to unravel back in 2007; but now the housing slump really does qualify as the worst economic disaster since the Great Depression.

Manufacturing Stalls

Looking to general manufacturing, the latest figures for Durable Goods reveal yet another staggering falloff. Totals were down some 3.6% in April.

And when you factor in inflation (which is damned hard to do these days, since Washington has “Hedonized” the numbers to meaningless goo), that figure looks a good bit worse, with what few “gaining” categories there are actually just showing increases in cost rather than growth in units sold.

Even if we were to look beyond the brim of our little fishbowl to such engines of outrageous growth as Brazil, China, and India, we see a falling off in copper demand. China in particular was truly awesome in the way it picked up the slack during the great funk of 2008-2009.

And while China still accounts for some 40% of copper consumption, our friends at the IWCC warn that demand growth there might drop from the double digits of the past few years to as low as 7% in 2011.

Why Would Anyone in Their Right Mind Buy Copper?

So once again, an honest investor interested in the long term — in the quality and value of this market — might ask, “Who is going to use all that copper the speculators are betting so heavily on?”

A body interested in cheap, fast, quite possibly immoral, but most certainly very REAL gains ought to ask a different question:

How can I quantify the cyclic nature of all that speculative interest — and then leverage same into cash in the bank?
 JJC on Rails
The answer lies in the chart of Barclay’s iPath DJ-UBS Copper TR Sub-Idx ETN (NYSEArca: JJC), a reasonably well-fed ETF that tracks against copper futures prices.

It places copper’s recent collapse and rebound in the context of its long-term rising trend dating back to January of 2009.

Sentiment Shifts: Right on Schedule

For the better part of the past 18 months, copper speculators have locked the JJC between two rising rails, limiting most all downside reactions to bad news and economics.

We are once again approaching that bottom limit.

And lo and behold, we are seeing positive copper memes begin to bubble to the top of the pot:Goldman’s buying callsCopper’s dip has made it a buyChinese factory managers are looking to restock for the second half of the year…”

It’s almost comical how reliable this change of sentiment has become at this phase in copper’s cycle.

If you want to speculate on the speculators (and yes, that idea is just as dotty as it sounds), here’s your play: JJC July 54 Calls (JJC1116G54) are available as I sit to write for $2.55 with a posted Delta of 0.5704.

If the copper ETF does nothing more than return to this week’s high of $55.50, you could expect to pocket some 24% gains. But that’s chicken feed compared to what would happen if the JJC makes it back to the highs of $61.60 it posted back in February…

That 0.57 Delta insures that a 13% move would push these contracts to $6.65 for gains somewhere around the 160% mark.

Take care,

adam english sig

Adam English
Editor, Outsider Club

follow basic @AdamEnglishOC on Twitter

Adam’s editorial talents and analysis drew the attention of senior editors at Outsider Club, which he joined in mid-2012. While he has acquired years of hands-on experience in the editorial room by working side by side with ex-brokers, options floor traders, and financial advisors, he is acutely aware of the challenges faced by retail investors after starting at the ground floor in the financial publishing field. For more on Adam, check out his editor’s page

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