Taking a Shine to Copper : The Physical-Based S&P GSCI Cash Copper Index

By virtue of its intrinsic properties, copper is used extensively in many manufacturing industries, from the production of power cables to consumer electronics. Statistics from the World Bureau of Metal Statistics (2012) reveal that global refined copper consumption reached over 19.5 million metric tonnes in 2011, with China accounting for 40% of the total. Between 2000 and 2011, Chinese demand grew by 13.5% each year, five times faster than the world average. Much of this growth was derived from the power generation sector, which now makes up 46% of total end-use demand in China, followed by household appliances and transportation. Over the last decade, this industrial metal's cash price has risen from USD 1,800 per metric tonne to the current USD 8,000, attracting the attention of both institutional and retail investors. Until recently, the main vehicles for investing in the copper market have been equities and futures contracts. However, investors can now gain direct exposure to copper by choosing products that are linked to the newly-launched S&P GSCI Cash Copper index. Responding to a growing interest in copper investments, S&P Dow Jones Indices launched the S&P GSCI Cash Copper index, which is designed to simulate the return of a physical copper holding without exposing investors to the roll return associated with trading futures contracts. In addition, this index, specifically designed for physically-backed investments, accounts for warehousing charges associated with storing the metal. In this paper, we will discuss the following topics:The fundamental drivers of the copper market;An introduction to the S&P GSCI Cash Copper index; The practical applications of the index;How copper returns are related to economic activity;The inflation properties of the index;Whether an allocation to the S&P GSCI Cash Copper index has historically offered any diversification benefits