On May 1, I wrote about copper futures falling below $4 per pound on Barchart. In that article, I highlighted copper’s bullish fundamentals, including the green energy initiatives increasing worldwide copper demand and falling copper inventories in the London Metals Exchange and COMEX warehouses. I concluded the piece with the following:
Copper’s short-term trend remains lower in early May, but the fundamentals suggest the red metal will find a bottom sooner rather than later. I favor accumulating copper on a scale-down basis during the current price weakness.
Nearby May COMEX copper prices were over $3.90 per pound on May 1, with the three-month LME futures at the $8,595.50 per metric ton level. So far, I have been dead wrong, and copper has yet to find a bottom. Fundamentals remain bullish, but the technical picture is ugly, with the nearby July COMEX copper futures below $3.75 and LME three-month futures at just over $8,250 per ton.
The bearish price action continues
After trading to a record $5.01 per pound high in March 2022, copper futures ran out of upside steam.
The ten-year chart shows the decline from the early 2022 high to $3.15 per pound in July 2022. Copper continued to make lower highs, failing at the $4 level in April 2023.
Three-month copper LME copper forwards reached $10,845 per ton in March 2022 and fell to $6,955 in July 2022. The price fell below the $9,000 level in April 2023.
The pattern of lower highs continues in late May 2023.
Copper inventories have increased since May 15, 2023
Copper warehouse stocks, which fell to lows in 2023, have been moving higher.
After dropping to the 50,000 metric ton level earlier this year, LME copper stocks rose to 91,975 tons on May 19.
Meanwhile, COMEX stocks have increased from below 15,000 tons in March to 27,674 metric tons on May 17. Rising stockpiles have weighed on copper’s price.
Recessionary pressures weigh on the red metal
The potential for a U.S. and global recession has caused copper prices to decline. Moreover, falling bonds (increasing interest rates) and a rising U.S. dollar have weighed on the red metal.
The one-month chart shows the bearish pattern of U.S. long bond futures. While copper ignored rising interest rates in March 2022 when the nonferrous metal rose to a record peak, the decline has caused the cost of carrying inventories to increase, a bearish factor for the industrial metal.
The U.S. dollar is the benchmark pricing mechanism for most commodities, and copper is no exception. While London is the hub of international base metals trading, the forwards trade in U.S. dollar terms.
The one-month dollar index chart shows the rally from the 100.42 low to the 103 level. A strong dollar tends to cause commodity prices to fall as prices rise in other currency terms. The price action in U.S. bonds and the dollar have been bearish for copper prices over the past weeks.
The three factors that could establish a bottom in copper futures and forwards
I remain bullish on copper and believe the price will hold the July 2022 $3.15 low. Three factors should support the red metal over the coming weeks and months:
- Copper remains the critical input in green energy initiatives. Goldman Sachs analysts call copper “the new oil,” saying decarbonization does not occur without the base metal. Electric vehicles, wind turbines, and other initiatives combating climate change require copper.
- While stockpiles have increased, the supply trend remains bearish. At below 100,000 tons, LME stocks are less than one-third of the level at the 2019 high. Moreover, new production will not increase supplies for years, as bringing new mines online takes nearly a decade.
- The highest inflation in decades has increased production costs, pushing output expenses higher and putting upward pressure on prices.
While the trend has been bearish since the March 2022 high, the long-term path of least resistance remains higher.
Copper still has downside room without negating the long-term bullish trend
At the $3.7320 per pound level on May 18, copper has room to challenge the July 2022 $3.15 low.
As the chart shows, critical technical support is 15.6% below the current price. Meanwhile, over two decades, copper has made higher lows and higher highs, and only a move below $3.15 would negate the bullish trend.
The LME three-month forward chart highlights the long-term bullish trend. At just above $8,250 per ton on May 19, technical support for the over twenty-year bullish trend stands at the July 2022 $6,955 per ton low, over 15.7% under the current price level.
Copper faces bullish fundamentals and bearish short and medium-term technical price action. The price could continue to decline towards the $3.15 level on futures and below $7,000 on the LME forwards, but supply and demand dynamics suggest that another higher low is on the horizon. Buying copper at the current price level requires leaving room to add on further declines. Pretty fundamentals and ugly technicals can create lots of volatility that can shake the confidence of even the most committed bull.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
