The Case for Copper-Related Investments After the Recent Price

In March 2022, the nearby COMEX copper futures price rose to a record $5.01 per pound high. While the nonferrous metals trade in the futures arena on the Chicago Mercantile Exchange’s COMEX division, the most active copper market worldwide is the London Metals Exchange. Futures provide for monthly delivery, while the LME forwards allow settlement each business day. Producers and consumers favor the LME as it enables hedging flexibility. The three-month LME forwards reached an all-time high of $10,845 per ton in March 2022.

Copper futures and forwards fell to $3.15 per pound and $6,955 per ton, respectively, in July 2022, a 37.1% drop in the futures and a 35.9% decline in the forwards. On February 24, the futures were sitting just below $4 per pound, with the forwards near the $8,800 level as copper was trading under the middle of the 2022 trading range. Rising interest rates and a strong dollar have weighed on copper prices since the March 2022 highs. As copper consolidates, the odds favor higher prices.

Copper is the new oil

• Goldman Sach’s analysts called copper “the new oil” starting in April 2021 because of its role in EVs, wind turbines, and other green energy initiatives.
• Goldman added there’s “no decarbonization without copper.”
• Goldman forecasted that copper’s price could rise to $15,000 per ton by 2025, putting COMEX futures prices above the $6.80 per pound level. 

Copper inventories have declined

• Inventories are a critical commodity supply and demand metric, and copper is no exception.
• LME stocks declined from over 380,000 metric tons in early 2018 to 65,000 tons on February 23, 2022, an over 82.8% drop.
• Copper inventories on the COMEX exchange decreased from nearly 36,000 metric tons in late 2022 to 19,292 tons on February 23, an over 45% decline over the past two months.

New production takes years- Costs and risks are rising

• Inflation is driving production costs higher.
• Political instability in Chile, Peru, and the Democratic Republic of Congo threatens current and future production.
• Mining companies are scrambling to locate new reserves in desirable, safe, and business-friendly mining jurisdictions.
• It takes the better part of a decade to bring new copper mines into production.

The technical trend remains bullish

• Copper’s price has made higher lows for over two decades.
• Copper reached a series of new record peaks in 2006, 2008, 2011, 2021, and 2022, with the latest new high at $5.01 per pound in March 2022.
• Copper corrected to $3.15 in July 2022 but was near the $4 level on February 24.
• While bull markets rarely move in straight lines, copper’s long-term trend remains bullish.

Assets that move higher and lower with copper

• Copper forwards, futures and options on the LME and COMEX are the most direct investments in physical copper.
• The U.S. Copper ETF (CPER) and the iPath Series B Copper ETN (JJC) track copper’s price. The Invesco DB Base Metals Fund (DBB) holds long positions in copper, aluminum, and zinc, and copper tends to lead the other nonferrous metals.
• Freeport McMoRan (FCX) and Southern Copper Corp (SCCO) are leading copper producers. Mining shares tend to outperform the metal on a percentage basis when copper’s price increases, but they often underperform during downside corrections.
• BHP Billiton (BHP), Rio Tinto (RIO), VALE SA (VALE), and Glencore (GLNCY) are some of the leading copper producers that tend to perform well when copper prices rise.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!