To say the least, 2014 has proven to be a difficult year for copper bulls. As you can see from the chart below, the metal has been drastically underperforming the major indexes such as the Dow Jones Industrial Average and the S&P 500. In addition the performance has also been lagging gold and silver. Unfortunately, news from this past week isn’t providing much comfort and it appears that the pressure will continue to be to the downside over the short-term. From a trader’s perspective, the strategic move will be to take this underperformance and examine the influence that it is having on copper exporting nations such as Peru and Chile.
Looking To Peru For Answers
Historically, Peru is known as one of the largest copper producing nations in the world. For metals bulls this dominant position has been one of primary thesis’ for investing in mining companies that have significant exposure to this region such as Southern Copper Corp. (NYSE:SCCO) and Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX). However, due to soft demand from China, the country is finding itself in a battle to maintain a seat amongst the top three producers (currently behind Chile and China). Unsurprising to most traders, this drop in production is seen as a temporary setback by Peru’s Ministry of Economics and Finance, which expects the nation to regain the title as the world’s second largest copper producer by 2017.
On April 10, 2014, the finance minister of Peru announced that GDP would not likely surpass 6% as was previously expected. This cautious sentiment is also echoed by the International Monetary Fund, which suggested on April 24 that “South American countries should consider creating fiscal stabilization funds to buffer their economies against a decline in commodity prices.” With so much negativity in the news it's not surprising to see that the iShares MSCI All Peru Capped ETF (NYSE:EPU) is facing downward pressure.
As you can see from the chart above, the Peru market has been facing steady selling pressure since early 2014. One spark of hope for the bulls emerged on April 17 when rumblings of a potential free trade agreement between India and Peru surfaced. The agreement would almost triple the trade volume between the countries. From a fundamental perspective, it will be interesting to watch the developments in the area because increased demand for Peru’s exports by countries such as India could be the long-term catalyst that is needed to reverse the downtrend. This speculation could also be the reason that the price of EPU has been able to push above the resistance of the nearby 200-day moving average for the first time since April 2013.
Declining Copper Prices
Unfortunately for traders looking to increase exposure to South American countries such as Peru or Chile, the price of copper does look like it will cooperate over the short run. As you can see from the chart below, the spot futures price is trading within a defined downtrend and it will need to overcome serious long-term resistance before the trend is able to reverse. The recent death cross of the 50-day and 200-day moving averages suggests that the momentum will remain to the downside, which will continue to put pressure on markets such as Peru and neighboring Chile as measured by the iShares MSCI Chile Index Fund (NYSE:ECH). For more on this topic, see A Different Way To Play South America.
The Bottom Line
Downward pressure on copper is testing bullish metal traders and should be factored in when investing in primary export countries such as Peru and Chile. As you can see from the charts above, the downside pressure will remain for copper-related companies such as SCCO and FCX, as well as many South American nations and especially Peru and Chile until a strong fundamental force such as a free trade agreement is signed. Until a fundamental shift in copper prices occurs it's best to proceed with caution.