Copper’s Price Movement and Recent Attempts at Recovery
Copper prices have been a mixed bag of late, with attempts at rallying falling short. After a dip to $3.5860 per pound on May 24, nearby December COMEX copper futures did show signs of life, forming higher lows and higher highs. This momentum briefly pushed the price past the $4 per pound mark on July 31 and August 1. However, the enthusiasm didn’t sustain itself, and by August 16, nearby COMEX copper futures were back to $3.6610 per pound. Although there has been some upward movement since September 11, copper hasn’t shown an impressive bullish run.
Stalling Momentum and Sideways Trading
A closer look at price analysis reveals that December copper futures hit a roadblock at $4.0380 per pound, the peak reached on August 1. Since hitting a high of $4.3330 in mid-January, copper futures have been on a corrective journey, largely following a bearish trend for most of 2023. However, since the May 24 lows, copper has largely traded within a range of $3.70 to $4.00 per pound.
Long-Term Outlook Remains Positive
Despite the recent consolidation, the long-term outlook for copper suggests a potential for higher prices. Examining a chart spanning over six decades, dating back to the late 1950s, it’s evident that copper reached an all-time high of $1.6475 per pound in 1988. It remained below the $1.65 level for seventeen years until breaking out in 2005. The last time nearby COMEX copper futures dipped below $2 per pound was briefly in January and February 2016, and they surged to a record high of $5.01 in March 2022. Over the past two decades, copper prices have consistently formed higher lows and higher highs.
Positive Fundamentals Supportive of Copper Prices
Fundamental factors also lend support to the notion of stable to higher copper prices. Key factors favoring this outlook include:
- Insufficient Copper Production: Copper production has struggled to keep up with rising demand, often taking around a decade to initiate new mining projects.
- Declining LME Copper Inventories: London Metal Exchange copper inventories have steadily decreased since mid-2019, dropping from nearly 340,000 to under 120,000 metric tons.
- Green Energy Initiatives: Copper plays a pivotal role in green energy initiatives, such as electric vehicles (EVs) and wind turbines, making it a vital component in addressing climate change. Goldman Sachs analysts have even dubbed copper “the new oil.”
Challenges from the Dollar and Interest Rates Despite these positive fundamentals and technical indicators, copper prices have struggled to break through the $4 per pound threshold. One significant factor has been the trajectory of U.S. and global interest rates, which has weighed on copper and other commodity prices. Hawkish monetary policies, implemented to combat inflation, have increased the cost of holding inventory, typically bearish for raw material prices.
Additionally, the U.S. dollar’s rise in recent months, with the dollar index moving from below 100 to over 105, has impacted copper. As the world’s reserve currency and a benchmark for pricing most commodities, the dollar’s strength has made copper and other commodities more expensive in other currencies. This price increase in local currencies has, in turn, put downward pressure on dollar-denominated copper prices, making it a bearish factor for the metal.
The Crucial Role of the Chinese Economy
While rising interest rates and a stronger U.S. dollar have posed challenges for copper, the weak state of the Chinese economy stands as the most significant factor affecting prices. Despite concerning economic data from China, copper has held its ground relatively well.
Caution and Opportunity
In Conclusion, considering the factors at play, it may be prudent to consider adding copper to portfolios around the $3.80 per pound mark. However, it’s essential to acknowledge the unpredictable nature of markets, where prices can plummet to levels that defy supply and demand fundamentals. Therefore, maintaining flexibility and allowing room for additional positions on further declines is a wise approach.
Featured Image: Freepik @ alexgrec
