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Copper- Consolidation In The Red Metal With Higher Highs On The Horizon

Barchart - Wed Feb 16, 10:09AM CST
Metals - Copper Rods Scrap Metal

Copper is the leader of the nonferrous metals that trade on the London Metals Exchange as aluminum, nickel, lead, zinc, and tin prices often follow copper’s price path. For decades, copper has been a leading economic indicator, but the increasing use in alternative energy initiatives has created an almost perfect bullish storm for the red base metal.

Before 2005, COMEX copper futures had not traded above the $1.61 per pound level. The price has not been below since 2009, and copper has not traded under $2 per pound since 2016. While we are looking down at the pre-2005 high, we may be doing the same to the $5 level over the coming years. Copper’s bull market began around the turn of this century, and the potential for much higher prices is rising. We are likely to see a $5 handle for the red metal sooner rather than later. 

A long-term bull market in the red metal

Since the turn of this century, copper has made higher lows and higher highs. 

The monthly chart highlights the bullish price action in the copper market over the past two decades. 

Meanwhile, since the May 2021 record high, copper has consolidated and digested the new peak, but the price action suggests that copper remains a tightly coiled bullish spring. 

The chart illustrates lower highs in the COMEX copper futures arena since May 2021. However, the red nonferrous metal has made higher lows since probing below $4 per pound during one day in August 2021. The wedge formation will eventually give way to higher or lower prices. The midpoint of the May and August 2021 high and low stands at around $4.44 per pound. At $4.5325 on February 16, copper was above the median level with an upside price bias. 

Technicals are slightly bullish as copper consolidates and builds cause for its next move higher or lower. Supply and demand fundamentals continue to favor the upside. 

Copper demand is rising as the world addresses climate change 

In 2021, when copper was on its way to a new all-time peak, Goldman Sachs analysts called copper “the new oil,” saying decarbonization does not occur without the red nonferrous metal. Copper is a critical component in electric vehicles, wind turbines, and other green initiatives. Goldman projected that the copper price will rise to $15,000 per ton in 2025, putting the COMEX futures price at over $6.80 per pound, $2 above the current record high from May 2021. 

Copper has long been a critical industrial infrastructure building block. Addressing climate change via alternative and renewable energy sources creates a new demand vertical for copper, the metal that has diagnosed the health and wellbeing of the global economy for decades. 

Supplies struggle to keep pace with the demand

As the demand for copper rises, producers struggle to keep up with rising requirements. It takes eight to ten years to bring new copper mines into the production phase. 

Cyclical price action in commodities tends to take prices to lows where production declines, inventories begin to drop, and consumers increase buying at bargain-basement prices. At highs, production increases, stocks tend to build, and consumers limit purchases and look for less expensive substitutes. The price cycle in commodities causes the cure for low and high prices to be those low and high prices. 

Meanwhile, in 2022, the copper price may be a stone’s throw from the My 2021 record high, but the price cycle suggests that fundamental changes in the red metal’s supply and demand equation point to higher highs over the coming months and years. Inventory data from the world’s leading copper exchange remain bullish, with copper at $4.50 per pound on February 16. 

Stocks are proof that the fundamentals are improving

The London Metals Exchange is the leading pricing hub for worldwide copper producers and consumers. The forward contracts offer hedging flexibility for industrial users. 

Source: LME/Kitco

The chart highlights the pattern of lower highs and lower lows in LME copper inventories over the past five years. At 70,125 metric tons in worldwide LME warehouses on February 15, stockpiles are under 20% the level in 2018 and one-third the level at the 2021 high. The decline in LME copper inventories with the price above the $4.50 level in mid-February 2022 tells us that demand remains robust, with copper trading at near the all-time high. The bottom line is that technical and fundamental factors suggest that higher copper prices are on the horizon over the coming months and years. The stockpile data indicates that copper is not near the top of its pricing cycle as supplies struggle to keep pace with the rising demand caused by decarbonization. 

Two ways to participate in rising copper prices over the coming months

Bull markets rarely move in straight lines, and higher prices tend to cause brutal and vicious selloffs and corrections. The copper futures arena can be highly volatile. From the May high through the August low, the price dropped by nearly 19% in four months. In 2008, as the global financial crisis gripped markets, copper fell from $4.27 in May to a low of $1.2475 per pound in December, an over 70% drop in seven months. By late 2010 copper was above the May 2008 high, and in early 2011 it reached a new all-time peak.  

When copper becomes a falling knife, it is wise and prudent to leave plenty of room to add on further price weakness, not leaving all of your eggs in one basket. 

I favor two routes for participation in the copper market for those who do not venture into the COMEX futures, or LME forwards arenas, copper ETFs and copper producers.

At the $27.63 level, the US Copper ETF product (CPER) had over $218 million in assets under management, trades an average of over 109,000 shares each day, and charges a 1.08% management fee.  

At $22.80 per share, the iPath Series B Copper Subindex ETN product (JJC) this ETF had over $73.7 million in assets under management and charges a 0.45% management fee. CPER is more expensive to trade, but it offers more liquidity as it has more assets. The ETF and the ETN do an excellent job tracking the red metals’ price. 

Copper producers offer leverage as they tend to outperform copper on the upside and underperform when the price falls on a percentage basis. Freeport McMoRan (FCX) is one of the world’s leading copper producers, with output in North and South America and Indonesia. At $44.20 per share, FCX had an over $64 billion market cap, trades an average of over 21 million shares each day, and pays shareholders a $0.30 annual dividend, translating to a 0.68% yield. 

Southern Copper Corporation (SCCO)is a leading Peruvian copper producer. At $68.15 per share, SCCO’s market cap was over $52 billion. Over 1.14 million SCCO shares change hands on average each day, and the company pays its shareholders a $4.00 per share dividend, equating to a 5.87% yield. 

Higher copper prices will likely lead to price appreciation in CPER, JJC, FCX, and SCCO. If copper is the new oil, these products could yield long-term profits. 

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