Buying (Going Long) Copper Futures to Profit from a Rise in Copper Prices

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Commodities Corner

Myra P. Saefong

Copper’s ‘bull market has only started’

Analyst’s long term view: copper prices have the potential to triple to $10+ long term.

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Copper has shown promise in recent weeks, and the long-term outlook is bright, as global demand gradually strengthens. But realizing that potential may take time, as the industrial metal must overcome worries about a global trade war and the U.S. dollar’s potential rise.

“The copper market is finally starting to look up after months of sideways consolidation, thanks to a strong economic outlook that was most recently underscored by the solid May jobs report in the U.S.,” says Tyler Richey, co-editor of the Sevens Report, a markets newsletter. The U.S. created 223,000 jobs in May, pushing the unemployment rate down to 3.8%—an 18-year low.

“Strong demand prospects paired with supply-side concerns stemming from South America are helping support the upside breakout,” says Richey.

A new round of labor negotiations at the world’s largest copper mine, Escondida in Chile, have buoyed prices for the metal, according to Robert Stall, U.S. mining and metals leader and valuation principal at EY. He says that when the Escondida union went on strike for 44 days last year, 156,000 metric tons of copper were removed from the market—so prices for the metal are “likely to continue upward if a settlement [on a new agreement] isn’t reached quickly.”

Futures prices for copper US:HGN8 on Comex settled at $3.30 a pound on Friday—the highest finish this year for a most-active contract. They scored a ninth weekly climb in 11 weeks.

“The bull market has only started,” says Leigh Goehring, managing partner at Goehring & Rozencwajg Associates. “Strong demand from Asian countries is what’s going to push copper prices higher, and this is before we even begin to talk about renewables and [their] impact on global copper consumption.” Renewable energy sources like wind and solar require lots of copper for their equipment.

He believes a “huge bull market,” led by extremely strong demand and emerging problems surrounding global copper supply, is likely to resume shortly and play out in “multiple stages over the next five to 10 years.”

The current bull market started after copper prices hit bottom in January 2020 at a little below $2, and it could see prices trade at $10 or more before it’s over, says Goehring. For now, however, copper prices trade about 1% lower year to date.

Analysts have said a strong dollar—with the benchmark ICE U.S. Dollar Index DXY, +0.50% trading up 1.6% so far this year—is at least part of the reason for the overall decline in the dollar-denominated metal, after two years of hefty gains. Copper futures climbed nearly 32% last year and about 17% in 2020.

Jeff Klearman, portfolio manager at exchange-traded fund issuer GraniteShares, says the climb in oil prices may also be partly to blame for copper’s year-to-date loss. “Higher energy costs increase the production cost of copper and…increase the cost of copper,” he says, adding that Brent crude prices UK:LCOQ8 were up 14% from April 1 to May 22, before a recent selloff.

Copper prices could fall even further in the event of a global trade war that slows global economic growth or China’s economy. “Copper would certainly take a hit,” says Jay Jacobs, director of research at ETF provider Global X. “China is the biggest consumer of copper, and therefore the economic data from China is often one of the biggest drivers of the metal’s prices.”

President Donald Trump’s trade policies have sparked concerns about a trade war. Those policies include a possible exit from the North American Free Trade Agreement and a refusal to exempt the European Union, Canada, and Mexico from tariffs on steel and aluminum. The latter decision has sparked retaliatory trade measures.

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“Global trade wars aren’t good for anybody, so if one breaks out, it will be a headwind for all commodity markets, including copper,” says Goehring.

Sevens Report’s Richey says that for now, the market is “OK with the global trade-war drama because most investors still believe things will be resolved in a relatively favorable manner.”

Features of exchange trading in copper (XCUUSD, Copper)

How to trade XCUUSD copper and HG copper futures correctly. It is not so easy to analyze quotes of copper due to high volatility and many fundamental factors affecting the price. This is intraday trading. We discuss the features of trade and analysis of the copper market.

In the last article we examined features of exchange trading platinum and found that this metal is great for long-term trading and investment. Today it’s the turn of another popular metal that is used by traders for intraday trading – copper is known to everyone from school lessons in chemistry.

More on copper

Exchange copper trading

Copper is an excellent conductor of electric current and is practically indispensable in the electrical industry for the manufacture of all kinds of wiring and other structural elements.

The production of electrical goods, automobiles, as well as the construction of houses is constantly growing, so the demand for colossal volumes of copper in all countries, both developed and developing, is stably high.

In the past, the United States occupied the first place in copper production in the world, but at the current moment, Chile is the world leader in the extraction of this metal. The three leaders also include Peru and China.

Copper as a stock asset

Just like gold, silver and platinum, copper is traded in pairs with the dollar on world exchanges. Copper is designated as Cuprum or XCUUSD. The English name for copper, which is also often found, is Copper. The standard exchange lot of copper is 25 tons.

Stock chart of copper

Just like for other metals, copper participates in London fixing, which sets the price considered official twice a day, and which is a guideline for the largest commercial banks and world exchanges.

For trading, traders prefer to use copper futures, since the volume of a standard lot on the exchange is too large. Copper futures has a ticker HG.

Unlike platinum, which is used for investment, copper, due to increased volatility, refers to risky assets and, most often, is used for intraday trading.

The price of copper is very well subject to the rules of technical and fundamental analysis, which makes it possible to build trading forecasts with high accuracy.

What determines the price of copper

The price of copper is affected by a complex of several main factors:

  • Demand level. The price of copper is very sensitive to macroeconomic statistics, since the state of the state’s economy affects industry, construction and so on, and therefore copper consumption. For example, China, which produces a huge number of electronic devices, is the largest consumer of copper. If the Chinese economy shows signs of a slowdown, it will negatively affect copper quotes, as the current demand for copper will be reduced.
  • Construction development. During construction, kilometers of wires are used, for the production of which copper is used. The construction sector is expanding, accordingly, demand for copper is growing, its exchange price is growing, and vice versa.
  • Offer level. For example, the accident at Yunnan Copper Group Co, the third largest copper producer in China, will reduce supply, resulting in higher copper prices.
  • Political and Economic Situation in Chile. Everything is simple here. Chile is the largest copper producer in the world, so Chilean pesos jumps, strikes, natural disasters, etc. may affect the amount of copper mined.
  • Seasonal factor. Historically, the greatest activity on the copper market has been observed from about mid-November to early May. During this period, copper is in high demand, and its price is rising. From the beginning of August to November, the “copper” market is in decline – quotes are declining.

Conclusion

In addition to responding to fundamental events, copper price perfectly lends itself to analysis by technical analysis tools. The high liquidity and volatility of copper quotes make it a suitable asset for scalping and day trading. However, experienced traders note that due to the sensitivity of copper prices to economic statistics, it is better not to trade metal in the days when important releases are published.

What are Copper Futures?

Copper futures investing is a popular way to hedge risk while getting some trading experience. Learn more about copper futures here.

  • 7 Basic Copper Facts for Investors
  • A Look at Historical Copper Prices
  • LME Copper vs. COMEX Copper
  • What are Copper Futures?
  • Top Copper Production by Country
  • Types of Copper Deposits in the World
  • Copper Ore Types: Sulfides vs. Oxides
  • Copper Refining: From Ore to Market

Trading copper offers many opportunities for investors to make gains. Copper futures are one method of trading copper, and they are a popular way to hedge risk while getting some experience trading the red metal.

But what should investors know before starting to trade copper futures? And what are the benefits of getting involved in this market? Here’s a brief overview of why people trade copper futures, how they do it and why it may be something you should consider.

Copper futures as an insurance policy

A copper futures contract typically represents 25,000 pounds of copper. Each contract is a firm commitment to make or accept delivery of a specified quantity and quality of the metal. Delivery is set for a specific month at a price agreed upon at the time the commitment is made.

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Many investors see this as an “insurance policy” for their portfolio. Those who consume or produce copper can manage copper price risk by employing a short hedge to lock in a selling price for the copper they produce, or a long hedge to secure a purchase price for copper they know they will need.

To implement a long hedge, enough futures need to be purchased to cover the quantity of copper required by the business operator. The downside of long hedges is that if the price of copper ends up falling, the buyer would have been better off without the hedge.

Copper futures are also traded by speculators who take more of a risk in order to possibly profit from a favorable copper price movement. Speculators buy copper futures when they believe that copper prices will go up, and sell when they think prices will fall.

How are copper futures traded?

Investors should become familiar with copper market participants and consumers and do due diligence on market trends before attempting to trade. Knowing economic trends for regions that consume copper at a high rate gives investors an edge when taking bold positions on contracts. Additionally, keeping up with production and consumption news can keep investors well informed about the daily direction of the market, which is helpful in evaluating the direction copper may go.

Of course, consulting qualified futures brokers who specialize in industrial metals and who can read the direction of the market will bring added value to an investor’s decisions.

For those who choose to shy away from actual futures contracts themselves, there are still options available for trading. A good alternative to owning contracts is to utilize the iPath Bloomberg Copper Sub-Index Total Return ETN (ARCA:JJC), which tracks front-month copper futures. Even if their volume is low, ETNs can allow new shares to be put onto the market, preventing liquidity issues.

There are quite a few large players in the copper space that can be affected by copper futures, including Freeport-McMoRan (NYSE:FCX), Glencore (LSE:GLEN,OTC Pink:GLNCY), Southern Copper (NYSE:SCCO), Rio Tinto (LSE:RIO,ASX:RIO,NYSE:RIO) and Anglo American (LSE:AAL,OTCQX:NGLOY).

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