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US Copper(CPER-A)

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Copper Plunges into the Buy Zone

Barchart - Wed Jul 13, 10:38AM CDT
Metals - Copper Rods Scrap Metal

Copper is the leading base metal on the London Metals Exchange. While copper futures trade on the CME’s COMEX division, the LME forwards are the most flexible and liquid copper contracts. Copper, aluminum, nickel, lead, zinc, and tin forwards trade on the LME. The LME in London is the international hub for nonferrous metals trading. However, a Chinese company owns the LME. China is the world’s leading base metals consumer as the metals are critical infrastructure building blocks. 

Copper’s price fell below a technical support level in June, plunging the metal into a bearish trend. However, the prospects for rising copper demand over the coming years could present a scale-down buying opportunity over the coming weeks and months. 

Copper moved from bull to bear

COMEX copper futures reached a record $5.01 high in March 2022, where the price ran out of upside steam. 

The chart highlights the rally that took nearby copper futures from a pandemic-inspired low of $2.0595 in March 2020 to a high of $5.01 per pound in March 2022. The two-year rally that took the red metal to all-time highs corrected, but the trend turned bearish when copper futures fell below the critical technical support level at the August 2021 $3.98 low in June. Copper futures were at the low at just above the $3.30 per pound level on July 13. 

Goldman’s call for $15,000 per ton by 2025

In early 2021, when copper was on its way to the first record peak at $4.8985 per pound, Goldman Sachs analysts forecast that copper would rise to $15,000 per ton by 2025 because the nonferrous metal is critical for decarbonization. A $15,000 per ton LME price translates to a COMEX futures price above the $6.80 per pound level. 

It takes almost a decade to bring new copper mines into production, and Goldman forecasts that the rising demand will cause a deficit that will push the price higher over the coming years. Copper made a higher high in March 2022 when the price probed above the $5 per pound level, but it failed and is not approaching the $3 level. 

Three factors lead to the decline- Chinese shutdowns, rising rates, and a higher US dollar

The three issues that caused the current slide in copper and other metals prices are:

  • Chinese lockdowns because of COVID-19 cases have caused the economy to slow. China is the world’s leading copper and base metals consumer, and the economic contraction has weighed on copper and other metal prices. In Q2, copper fell by over 20%, and a composite of the six base metals on the London Metals Exchange dropped 27.24%.
  • Rising US and worldwide interest rates increase the cost of carrying inventories, which contributed to the slide. The US Federal Reserve will continue increasing short-term rates and reducing its swollen balance sheet. Rising rates are bearish for raw material prices. 
  • The US dollar is the world’s reserve currency and the pricing mechanism for most commodities, including copper and base metals. While London is the hub for international base metals trading, the forward contracts are in US dollars. A rising dollar has caused metal prices to rise in other currency terms, putting downward pressure on US dollar prices. 

Over the past months, the three factors have created an almost perfect bearish storm for the copper market. 

Three reasons to buy copper on a scale-down basis

It is virtually impossible to pick tops or bottoms in bull or bear markets. Prices often rise and fall to illogical, irrational, and unreasonable prices during rallies and corrections. 

The current correction continues to take copper to lower lows, but three factors will likely create a bottom over the coming weeks and months:

  • Decarbonization- EVs, wind turbines, and other alternative and renewable energy initiatives will continue to support worldwide copper demand. A developing deficit in the copper market will support prices over time. 
  • Inflation and supply chain issues- Inflation remains at an over four-decade high. Supply chain problems, exacerbated by the war in Ukraine and post-pandemic factors, will continue to increase production costs. Higher production expenses support higher copper prices. 
  • China will emerge from its economic malaise- China will eventually reopen with lots of pent-up demand for copper, base metals, minerals, and many other commodities. When China’s economy turns, copper could take off on the upside. 

The case for rising copper prices remains compelling. The current correction may take the price to lower lows, but it should eventually find a significant bottom and move back into a bullish trend. 

CPER is a liquid copper ETF product

Copper remains in a bear market after falling below the August 2021 $3.98 per pound low from a trend-following perspective. However, decarbonization, inflation, and a Chinese economic recovery are reasons to consider a scale-down buying approach now that the base metal is on sale at over 30% below the March 2022 high. 

The most direct route for a long position in copper is via the LME forwards or the COMEX futures. At around the $20 per share level on July 13, the United States Copper ETF product (CPER) has $136.795 million in assets under management. The ETF trades an average of 201,749 shares daily and charges a 1.08% management fee. 

Nearby COMEX copper futures fell from $5.01 in March to a low of $3.2300 on July 13, or 35.5%. 

Over the same period, CPER fell from $30.12 to $19.43 per share, or 35.5%. CPER does an excellent job following the copper price on the up and downside. 

I favor accumulating the CPER ETF product, leaving plenty of room to add on further declines. Copper is a metal with an expanding addressable market as the world deals with climate change. Copper is in the buy zone after it has lost one-third of its value, but that does not mean the price will not fall further before finding a bottom and turning higher. 

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Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.