Four ways to play copper

Major copper producers, both individual companies and countries, have seen significant declines in share prices and single-country stock indexes.

However, we think such declines are creating opportunities for long-term investors. Here, we examine the outlook for copper and various ways to gain exposure to it, including copper futures ETFs and single-country ETFs for copper-producing nations.

After reaching nearly $4.60 per pound in the second quarter of 2011, copper prices fell off a cliff, dropping nearly 10% in August and more than 25% in September. Since then, prices have been volatile, recently rebounding to about $3.50.

Despite the precipitous decline, recent prices are still not unfavorable for copper producers, especially compared to the misery of 2008, when prices touched $1.38 per pound.

Backstopping the copper price are two factors impacting both demand and supply. Demand is expected to increase as the global economy continues to grind along and the Japanese continue to rebuild after the tsunami and earthquake of March 2011.
Producers are likely to expand production to profit from higher prices against their low costs, but such new production isn�t likely to come online until the end of 2012 at the earliest.

One way to gain direct exposure to copper prices is iPath DJ-UBS Copper Total Return (JJC), an ETN that reflects returns on copper futures contracts.

It invests in a single futures contract that is rolled over monthly, exposing investors to roll yield (the gain or loss from buying a respectively lower or higher priced subsequent contract).

However, JJC has tracked the performance of copper spot prices (that is, market prices) fairly well over longer periods.

US Commodity�s new United States Copper (CPER) is an ETF that also invests in copper futures, but it is allowed to invest in a combination of highly liquid futures contracts, a strategy that is expected to make roll yield as favorable as possible to investors.

If CPER is able to do that, returns over time could be superior to and less volatile than the actual price movements of copper.

However, for now we continue to prefer JJC � even though it is an ETN and therefore exposes investors to the (minimal) credit risk of its issuer, Barclays � for exposure to copper prices until CPER proves its mettle.

Single-country ETFs focused on the top two copper producing nations -- Chile and peru -- are also attractive now.

Chile produces more than one third of the world�s copper and has more than 35% of global copper reserves. As such, iShares MSCI Chile (ECH) is an indirect play on copper prices and production.

ECH benefits as well from an increasingly vibrant economy, buttressed by the Chilean government�s rational fiscal policy.

iShares MSCI Peru (EPU) has more than 55% of its portfolio in materials companies, most of which mine copper among other metals. These companies do most of their production in Peru (the #2 producer of copper globally).