Copper Attempts To Break Higher- The Prospects Remain Bullish
On October 28, in an article on Barchart, I wrote, “The fundamentals favor a higher copper price over the coming years. Rising interest rates and a strong US dollar, the price 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.” On that day, nearby December COMEX copper futures closed at $3.4290 per pound. December copper futures had been trading between $3.1355 and $3.7835 since July 1. In November, the price broke out to the upside as copper threatened to challenge the $4 per pound level. Freeport McMoRan (FCX) is a leading copper producer, and its shares have been moving higher and lower with the red nonferrous metal.
Copper traded to over $5 per pound in March before correcting
Nearby COMEX copper futures reached a new record high of $5.01 per pound.
The long-term chart dating back to the late 1960s shows the pattern of higher lows and higher highs that took the red nonferrous metal to over $5 per pound for the first time. Even the most aggressive bull markets rarely move in straight lines, and corrections can be brutal. After reaching $5.01 in March, copper ran out of upside steam and fell to a low of $3.15 four months later, in July 2022, an over 37% decline.
Higher lows and higher highs since the July low
The mid-July low in copper gave way to a return to a bullish trading pattern.
The short-term chart illustrates the trend of higher lows and higher highs in the COMEX copper futures market over the past months. December futures rallied from $3.1355 on July 15 to a high of $3.7835 on August 26 before turning lower. Meanwhile, in early November, the red metal exploded above the August 26 high, reaching $3.96 per pound before pulling back below the $3.6320 level on November 18.
Interest rates and the dollar have been bearish- The recent moves have supported copper
Since the move to a new all-time peak in March 2022, rising US interest rates have weighed on copper and other commodity prices. Higher rates increase the cost of carrying inventories and push the dollar higher against other currencies. The dollar is the pricing benchmark for most commodities, and copper is no exception. Raw material prices tend to decline when the dollar rallies. Over the past months, interest rates and currency markets have packed a bearish punch for copper.
The chart of the US 30-Year Treasury bond futures shows the bearish pattern and rising interest rates over the past months. The most recent low of 117-19 was the lowest level in eleven years since February 2011.
The chart of the US dollar index, which measures the US currency against other world reserve currencies, shows the bullish trend in the dollar. The dollar index rose to the highest level in two decades in 2022.
Rising interest rates and a strong US dollar have been bearish for copper and other commodity prices over the past months.
The four reasons for higher copper prices
Yogi Berra, the late Hall of Fame Yankee catcher and armchair philosopher, once said, “The future ain’t what it used to be,” and that sums up why copper’s supply and demand fundamentals have dramatically shifted, supporting higher prices. At least four factors support even higher highs than the March 2022 $5.01 peak over the coming months and years:
- Copper has become a critical “green energy” metal as it is required to produce electric vehicles, wind turbines, and other green initiatives. Goldman Sachs research analysts called copper “the new oil” in recent reports.
- Worldwide copper production is struggling to keep pace with the demand, and it takes the better part of a decade to bring new production online.
- Higher interest rates and the strong US dollar resulted from the highest inflationary pressures since the early 1980s. The most recent core CPI and PPI readings remain three times higher than the US central bank’s 2% target rate. Inflation caused production costs to increase, putting upward pressure on copper’s price.
- China is the world’s leading copper consumer, requiring more than half the world’s refined copper in 2021. As China emerges from its economic slowdown and COVID-19 protocols, the world’s most populous country will likely require more copper.
Meanwhile, global copper inventories have been declining, and the London Metals Exchange is the world’s top copper trading exchange.
The chart shows that LME copper inventories have made lower highs over the past five years. At the 89,750 metric ton level on November 18, LME copper stocks were nearly 300,000 tons lower than the level in 2018.
The bottom line is that copper fundamentals provide a compelling case for higher copper prices over the coming months and years.
FCX shares have moved with copper
In 2021, Freeport McMoRan (FCX) was one of the leading worldwide copper-producing companies.
Nearby COMEX copper futures reached a low of $2.0595 per pound in March 2020. Two years later, the $5.01 high was a 143.3% gain for the metal. Mining companies often outperform the metal’s price action on the upside and underperform when the price declines.
The chart highlights FCX’s rally from $4.82 in March 2020 to $51.99 per share in March 2022, a 978.6% gain. At the $3.6770 level on November 18, copper futures fell 26.6% from the March 2022 high. FCX shares at the $36.34 level on November 18, corrected 30.1% from the March peak. FCX tends to provide a leveraged return to copper, tracking its price on the up and downside.
FCX is a highly liquid stock. At the $36.34 level, the company had an over $51.9 billion market cap. The average daily volume is over 16 million shares, and the company pays shareholders a $0.30 or 0.83% dividend yield.
Goldman Sachs believes copper prices could rise to $15,000 per ton over the coming years, translating to over $6.80 per pound on the nearby COMEX copper futures contract. At that level, FCX shares could outperform the metal on a percentage basis, offering investors and traders a significant gain from the current $36.34 per share price.
More Metals News from Barchart
- Dollar Gains on Higher T-note Yields
- Stocks See Support from Retailer and Trade News
- Dollar Gains on Hawkish Fed Comments
- Stocks Slump on Hawkish Fed Official’s Comment
Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.