Signs of Bullish Life in Copper

Copper trades on the CME’s COMEX division in the futures market. Meanwhile, the most liquid copper market is the London Metals Exchange or the LME. The LME offers a three-month copper forward contract. While futures allow delivery during the delivery period when futures expire, LME forwards permits the physical transfer, as contracts can settle each business day. The LME provides far more flexibility for producer and consumer hedging. 

Market participants have many options for investing or trading copper. ETF and ETN products trade on the US stock market and shares of copper producers can enhance price moves as they often outperform the price action in the metal on the upside and underperform when copper corrects. 

Copper corrected from its all-time peak

COMEX copper futures reached a record peak in March 2022 when the price traded to $5.01 per pound. 

The chart highlights that copper futures ran out of upside steam at just over $5 and declined to a low of $3.15 in July, a 37.1% drop. Copper futures were sitting at the $3.4170 per pound level on October 28, in the middle of the recent consolidation trading range. 

Copper has been consolidating over the past months

From a short-term perspective, copper has been consolidating since reaching the July low.

The chart illustrates COMEX December copper’s trading range between $3.1355 and $3.7835 since July. At below the $3.42 level on October 28, copper was just under the midpoint at the end of last week. A move above the $3.60 level would end the pattern of lower highs that has been in place since the March 2022 high. If copper rallies above $3.80 per pound, it will signal a technical breakout and a return to the longer-term bullish trend. 

The three compelling reasons for upside exposure to the red metal

At least three factors favor a return to bullish price action in the COMEX copper futures and LME copper forward markets:

  • In 2021, Goldman Sachs’ analysts called copper the “new oil” because of its role in the green energy revolution. Copper is critical in electric vehicles, wind turbines, and other green energy initiatives. Rising demand for addressing climate change supports higher copper prices. 
  • Increasing copper demand will lead to more production, but it takes the better part of a decade to bring new copper mines into full production. As the demand side of the fundamental equation increases, supply must keep pace. The 2021 Goldman Sachs research report forecast that copper’s price will rise to $15,000 per ton in the coming years, translating to a $6.80 per pound level on the nearby COMEX futures contract. 
  • The long-term trend dating back to the early part of this century remains bullish, and the trend is always your best friend in markets. Before 2005, COMEX copper futures never traded above the $1.6475 1988 high. 

Meanwhile, inflation is causing production costs to rise, putting upward pressure on copper’s price. Copper’s balance sheet remains tight, and the trend in LME copper inventories highlights the fundamental strains facing the nonferrous metal. 

Source: LME/Kitco

The chart shows that LME copper stockpiles have made lower highs over the past five years, reflecting the increasing worldwide demand and copper’s tightening balance sheet. 

ETF and ETN products follow copper prices

The most direct route for a copper investment or trading risk position is via the COMEX futures and futures options or the LME forwards and forward options. Meanwhile, two products trading on the stock market move higher and lower with copper’s price:

  • At $20.70 per share, the US Copper ETF product (CPER) had $164.490 million in assets under management. CPER trades an average of 141,668 shares daily and charges a 1.08% management fee. 
  • At $17.20 per share, the iPath Series B Copper Subindex TR ETN product (JJC) had $57.89 million in assets under management. JJC trades an average of 26,785 shares daily and charges a 0.45% management fee. 

While the ETN carries a lower management fee than the ETF, buyers assume the additional risk of the ETN issuer. However, both products do an excellent job of tracking copper’s price action on the up and downside. 

FCX and SCCO are leading copper producers

Mining companies tend to magnify copper’s price action on the up and downsides, outperforming the price on a percentage basis during rallies and underperforming during downside corrections. Two leading copper producers that follow the metal’s price with leverage are:

  • Freeport McMoRan (FCX) is a leading copper producer. At $31.80 per share on October 28, FCX had an over $46.79 billion market cap and trades nearly 16 million shares daily. FCX pays shareholders a $0.30 dividend, translating to a 0.94% yield. 
  • Southern Copper Corporation (SCCO) is another top global copper producer. At $47.20 per share on October 28, SCCO had a $37.38 billion market cap. SCCO trades an average of over 1.6 million shares daily and pays shareholders a $3 dividend, translating to a 6.36% yield. 

The fundamentals favor a higher copper price over the coming years. Rising interest rates and a strong US dollar, the pricing benchmark for copper, have weighed on the price since the March 2022 all-time high. I favor a long position in copper, leaving plenty of room to add on further declines. 

The CPER ETF, JJC ETN, FCX, SCCO, or other copper-related instruments will reflect the red nonferrous metal’s price action over the coming months and years. The recent price action has been constructive, with copper moving above the midpoint of the short-term trading range. A move above $3.80 per pound could lead to new all-time highs and a rally towards Goldman Sach’s target at the $6.80 per pound level on the nearby COMEX futures contract. 

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On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes.

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