Nearby COMEX copper futures were sitting at the $4.0735 level on February 23, 2023, when I wrote, “over the past month, copper has not appreciated because the macroeconomic landscape indicated a hawkish central monetary policy pushing interest rates and the U.S. dollar index higher. Copper’s price has continued to consolidate in the face of increasing rates and a rebound in the dollar, a sign of underlying strength.”
As the markets move into 2023’s second quarter, the macroeconomic landscape could be shifting in the red metal’s favor. The U.S. Copper ETF (CPER) tracks copper prices higher and lower.
The Fed rate hikes look set to end
After trading to a $5.01 per pound high in March 2022, rising U.S. interest rates and the strongest dollar in two decades sent copper futures prices down to a $3.15 low four months later in July. While the 37.1% correction did not negate the long-term bullish trend, the significant decline caused many market participants to abandon long positions. The total number of open long and short positions in the COMEX copper futures market fell from nearly 210,000 contracts in March 2022 to below 150,000 contracts in November 2022. Rising interest rates increase the cost of carrying copper inventories, and a stronger dollar makes copper more costly in other currency terms, leading to the price correction.
Meanwhile, at the latest March FOMC meeting, after a pair of U.S. bank failures and UBS’s takeover of troubled Credit Suisse, the U.S. central bank increased the Fed Funds rate by 25 basis points to between 4.75% and 5.00%. Quantitative tightening at $95 billion monthly continues as the Fed reiterated its commitment to push inflation to its 2% target rate. However, supply-side pressure could make the arbitrary goal challenging. While the Fed’s policies remain hawkish, the central bank did not increase the end of 2023 forecast for the Fed Funds Rate from the current 5.13%, implying only one more 25 basis point increase in 2023. As the central bank moderates its hawkish monetary policy, copper has moved to the midpoint between the March 2022 high and July 2022 low. On April 4, the price of nearby March COMEX futures was at the $3.97 per pound level.
China is emerging from its economic malaise
The end of China’s COVID-19 lockdowns means an economic comeback for the world’s most populous country with the second-leading global economy. Chinese economic growth will likely give a significant boost to worldwide copper demand.
Source: Statista
The chart highlights that China is the world’s leading copper consumer. In 2021, China was responsible for 52% of the worldwide copper demand, more than three times Europe, the second-top consumer. Economic recovery in China supports copper prices.
Oil and gasoline prices are recovering
Over the past years, Goldman Sachs analysts have called copper “the new oil” because of the metal’s role in green energy initiatives. In an April 2021 commodities research report, the analysts wrote there is “no decarbonization without copper,” as EVs, wind turbines, and other alternative energy sources require the metal.
Meanwhile, alternative and renewable energy compete with traditional fossil fuels. As oil and oil product prices rise, the demand for other energy sources increases.
The chart shows the recent turnaround in crude oil prices that reached a $64.12 low on March 20, 2023. On April 4, nearby NYMEX May crude oil futures were over $15 higher, above $80 per barrel.
Meanwhile, seasonality and the recent rise in crude oil have pushed gasoline prices from $2.0204 in mid-December 2022 to the $2.7140 per gallon wholesale level on April 4.
Rising hydrocarbon prices are bullish for copper, but they also increase production costs as producing copper is energy intensive. Therefore, rising oil and oil product prices put upward pressure on the red nonferrous metal.
Copper’s consolidation period ends with a break above $4.3145
Nearby COMEX copper prices have made higher lows and higher highs since the July 2022 $3.15 low. During 2023’s first quarter, the price has consolidated around the $4 per pound level.
The three-year chart illustrates the technical resistance level at $4.3145, the January 16 high. A move above that price could trigger trend-following buying and an explosive move to the upside in the metal Goldman Sachs believes is the energy commodity of the future.
CPER is an ETF that tracks copper’s price action
The most direct route for a risk position in copper is the COMEX futures and futures options or the LME forwards and options. Market participants seeking exposure without venturing into the futures or forwards arena can consider the U.S. Copper ETF (CPER). At around $24.35 per share on April 4, CPER had $152.215 million in assets under management. CPER trades an average of nearly 83,500 shares daily and charges an 0.88% management fee.
Nearby COMEX copper futures rose from $3.15 in July 2022 to $4.3145 in mid-January, a 37% increase.
Over the same period, CPER rose from $19.11 to $26.38 per share or 38%, as the ETF does an excellent job tracking nearby copper futures prices.
China and rising energy prices could launch copper above the $4.3145 resistance level, which could lead to an explosive rally that challenges the $5.01 high. CPER could be the perfect tool for investors seeking copper exposure without dealing with the leverage and margin in the futures and forward arenas.
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.
