Commodities/Forex

Andy Hecht

Top 3 Ranking in Commodities, Metals & FX --SeekingAlpha

Copper Waits For News

  • Copper has been trending lower since April
  • Trade is the leading issue
  • Inventories have declines
  • Copper takes a wait-and-see position on progress
  • The levels to watch in the copper market

The price of copper traded to its all-time high in 2011 when many other commodity prices reached peaks. The red metal reached $4.6495 per pound. A correction took the base metal to a low at $1.9355 in January 2016, when many members if the commodities asset class were making multiyear lows in late 2015 and early 2016.

Since the low, the price of copper recovered to a high of $3.3220 in December 2017. In June 2018, the price failed just shy of the late 2017 peak and fell from $3.3155 per pound. A combination of a strong dollar and the trade war between the United States and China has weighed on the copper market. As of the end of last week, the red metal was trading at $2.6360 per pound after recently trading to a low at $2.4675, the lowest price since December 2016. Copper had been trending lower over the past months. The leader of the nonferrous metals is waiting for news. Copper is a barometer of the health and wellbeing of the global economy. 

Copper has been trending lower since April

The price of copper has been making lower highs since mid-April as a strong dollar, and the trade war between the US and China have weighed on the price of the red metal. 

Source: CQG

As the weekly chart highlights, the price of copper began to slump in April when it failed to climb above the $3 per pound level. The base metal reached $2.9955 and fell to a low at $2.4675 in early September. Since then, nearby COMEX copper futures have been consolidating in a range from $2.5150 to $2.6835 per pound. At $2.6440 on October 18, the metal that reflects the health of the global economy was above the middle of its recent trading range. Both price momentum and relative strength metrics were in neutral territory at the end of the week, with momentum rising. However, the total number of open long and short positions in the COMEX futures market declined from 296,270 contracts in early August when copper was on its way to the low. On October 18, the open interest metric stood at 253,939 contracts, a drop of 14.3%. The falling number of open positions reflects the decline in interest as the price of copper consolidates. 

 

Trade is the leading issue

Trade remains the most significant issue when it comes to the path of least resistance of the price of copper. China is the demand side of the equation in the copper market, and the trade war has weighed on the price of the red metal. 

In early August, US President Donald Trump escalated the trade war by slapping additional tariffs on the Chinese. The US President became frustrated with the pace of negotiations and China’s backtracking on previously agreed issues. The Chinese swiftly followed with retaliatory measures. Meanwhile, on October 11, the two sides appeared to be making progress. The prospects for a “phase one” agreement that would prevent more protectionist measures and cause China to purchase US agricultural products injected optimism into markets across all asset classes. The price of December COMEX copper futures rose from $2.5605 on October 9 to just under the $2.65 level over the recent trading sessions. A deal on trade would be highly supportive of the price of copper. 

On October 18, China reported that GDP growth fell to 6%, the lowest level since 1992. However, the price of copper rallied as it focused on the progress on trade instead of the impact of the trade war on the Chinese economy. 

 

Inventories have declined

One of the metrics that can impact the price of copper because it reflects the state of supply and demand is the inventory data from the London Metals Exchange and the COMEX division of the CME. When inventories decline, it is a sign of rising tightness in the market that can lead to price appreciation. 

Source: Kitco/LME

As the chart illustrates, LME inventories declined from over 335,000 metric tons in early September to 268,400 tons as of October 18.  

Source: Kitco/COMEX

At the same time, COMEX stockpiles dropped from over 44,500 tons in mid-September to 35,088 tons on October 18. The decline in inventories is a supportive factor for the price of copper. 

 

Copper takes a wait-and-see position on progress

Copper is waiting for further news on trade. China is the demand side of the fundamental equation. News that increases optimism when it comes to economic growth in the world’s most populous nation would lift the prices of copper and other industrial commodities. 

Meanwhile, the recent price action in the dollar has provided support. Copper hit its low in early September; at the same time, the dollar index rose to its most recent high. 

Source: CQG

The chart of the nearby dollar index futures contract shows that it rose to a high at 99.33 in early September. On Friday, October 18, the index was at just under the 97 level, which provided support for the price of copper. A falling dollar tends to be bullish for the prices of commodities, and copper is no exception. 

 

The levels to watch in the copper market

The critical level of technical resistance in the copper market is at the early September low at $2.4675 per ounce. To break the pattern of lower highs that has been in place since April, copper would need to rise above the $2.80 level. 

Freeport McMoRan (FCX) is a copper producer that tracks the price of copper. The company produces copper in North and South America and Indonesia. The mineral export ban impacting the nickel market has likely weighed on the price of FCX shares along with weakness in the price of copper. However, FCX tends to do an excellent job when it comes to moving higher or lower with the price of the leader of the base metals sector.  

Source: Barchart

Since the start of 2018, FCX shares have traded in a range from $8.43 to $20.25 per share. At under $10 per share on Friday, October 18, FCX shares could move appreciably higher if the US and China continue to de-escalate the trade war. FCX has a market cap of $13.9 billion and trades at around 14 times earnings. The shares pay a 2.11% dividend. FCX trades over 21.6 million shares each day, making it a highly liquid stock. 

Copper is waiting for news on trade. Meanwhile, the falling dollar, declining stockpiles on the LME and COMEX, and optimism over progress in negotiations could make both copper and FCX an attractive buy at their current levels. 

Andy Hecht covers Commodities and Forex as one of the original contributing analysts at FATRADER. A former senior trader at one of the world’s leading commodities trading houses, Philipp Brothers (now part of Citigroup), Andy has worked and consulted for banks, hedge funds, and commodities producers and consumers around the world for over 35 years.
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