Copper, a key industrial metal, has faced a significant decline in value over the past months. This article explores the various factors exerting pressure on copper prices.
Interest Rates and the Strong Dollar
One major factor contributing to the copper slump is the rise in U.S. interest rates. As rates increase, the cost of holding raw material inventories grows, which impacts copper prices. Simultaneously, higher U.S. rates strengthen the dollar against other reserve currencies. This stronger dollar has been bearish for commodities like copper since July.
The U.S. 30-year Treasury bond futures have been in a bearish trend since 2020, and their recent decline to levels not seen since 2007 has coincided with lower copper prices. The decline in copper prices throughout 2023 aligns with rising interest rates.
Chinese Economic Weakness
China, the world’s largest consumer of refined copper, plays a significant role in the demand for this metal. Copper is crucial for infrastructure development, making it a barometer for global economic growth. However, China’s economic struggles in 2023 have caused a decline in its demand for copper. With a population of over 1.4 billion, China’s economy significantly influences copper prices, and its consistent weakness in 2023 has weighed on the red metal.
Bullish and Bearish Factors
While copper has faced substantial downward pressure, there are factors that still support its value:
1. Tightening Inventories: Over the past five years, copper inventories have decreased, and production struggles to keep up with global demand. It takes years to bring new production online, particularly in politically unstable regions.
2. Inflation and Rising Interest Rates: Rising inflation and interest rates have increased production costs, making financing for new production expensive. This exerts upward pressure on copper prices.
3. Green Energy Initiatives: The shift toward green energy, driven by electric vehicles and wind turbines, has boosted copper demand, as these technologies require substantial amounts of nonferrous metal.
Copper’s long-term bullish trend remains intact, despite the recent decline from over $5 to under $3.60 per pound.
In addition to the bullish factors, several bearish elements have influenced copper prices negatively:
1. Higher U.S. Interest Rates: The rising cost of carrying inventories due to higher interest rates has pushed copper prices lower.
2. Strong Dollar Index: A stronger dollar, as the world’s reserve currency, has a bearish impact, even though London serves as the hub for international copper trading.
3. Short-Term Bearish Trend: The short-term trend in 2023 has been bearish, with copper reaching new lows in early October.
Investor Outlook
Despite the bearish trend in 2023, some remain bullish on copper due to fundamental supply and demand dynamics. However, picking market bottoms can be challenging, so investors are advised to exercise patience and be prepared for further declines.
Investors interested in copper can consider the U.S. Copper ETF product (CPER), which closely tracks copper prices. CPER has $129.2 million in assets under management and trades during U.S. stock market hours. It provides a way to gain exposure to copper without directly trading the futures.
Summary
Copper is currently facing downward pressure due to rising interest rates and a stronger dollar, but underlying supply and demand fundamentals suggest a potential bottom in the near future.
Featured Image: Freepik