In a July 13, 2023, Barchart article, I suggested it was a good time to scoop up copper. The nearby September COMEX copper futures contract was at the $3.8540 per pound level in mid-July. In that piece, I wrote:
Now could be the perfect time to buy copper but would leave plenty of room to add on further price declines. A hawkish Fed could cause the price to drop, but the demand fundamentals and supply concerns will likely limit the downside. However, as prices can rise to crazy levels on the upside, sudden selling can also send copper and other commodities to irrational, illogical, and unreasonable prices on the downside. If that happens, I will buy scale-down as the bullish fundamentals remain compelling.
In mid-August, September COMEX futures were lower, but I believe that copper prices will eventually surprise on the upside.
Copper continues to fail over $4 per pound
Throughout 2023, COMEX copper futures have failed in attempts to eclipse the $4 per pound level.
The September COMEX copper futures chart highlights the mostly bearish trend in 2023. Copper has made lower highs throughout 2023, with the latest failure coming after the $4.0240 August 1 peak. On August 16, nearby September futures were below the $3.70 level, heading for a test of the first technical support at the May 24 $3.5650 low.
China is critical for the path of copper prices
China dominates the copper and most commodity markets as it is the world’s leading copper consumer. Copper is an infrastructure building block, and China’s growth over the past years has put the world’s second-leading economy in a dominant position for the path of least resistance of copper prices. Copper prices rise and falls with the Chinese economy.
Source: Statista
The chart shows that China was responsible for 55% of the world’s refined copper consumption in 2022.
China’s economy is under pressure but will improve
The pandemic and geopolitical tensions have taken a toll on China’s economy. In July, retail sales in China rose by a meager 2.5%, below the 4.5% forecast. July industrial production increased by 3.7%, under the 4.4% consensus estimate. Fixed asset investment for the month grew by 3.4%, under the 3.8% forecast.
Economic indicators suggest a significant slowdown in Chinese growth in 2023, weighing on copper and other commodity prices. Doctor copper is the commodity that tends to diagnose the health and well-being of the worldwide economy. Since China is the demand side of copper’s fundamental equation, weak Chinese data has caused bearish price action in the COMEX copper futures market and the LME forward copper market in 2023.
Meanwhile, China is approaching the U.S. for economic leadership. Over the coming years, the Chinese GDP will likely overtake the United States. While economic lethargy has persisted throughout 2023, China will eventually emerge from its slowdown, increasing copper prices.
Climate change initiative and copper’s fundamentals should support prices
While China’s economy is critical, copper demand is also a function of initiatives addressing climate change. Electric vehicles, wind turbines, and other green energy initiatives require additional copper each year. Meanwhile, mine supply has stagnated, with a long lag to bring new production online.
A recent article on Mining.com outlines that “The global copper market is entering an age of extremely large deficits.” The bottom line is supplies will struggle to keep pace with the increasing demand. While the technical trend throughout 2023 is mostly bearish, fundamental factors provide support, and prices should find a bottom sooner rather than later.
CPER is a copper ETF that tracks COMEX prices
The most direct route for investment in copper is through the COMEX futures and futures options or the London Metals Exchange forwards and options. Copper mining companies can provide leveraged exposure to the copper price, but they carry additional risks, including management, specific mining properties, and political risks in countries with copper reserves.
The United States Copper ETF product (CPER) moves higher and lower with copper prices. At $22.77 per share on August 16, CPER had $135.165 million in assets under management. CPER trades an average of 121,121 shares daily and charges an 0.88% management fee.
The most recent rally in September COMEX copper futures took the price 12.9% higher from $3.5650 on May 24 to $4.0240 on August 1.
Over the same period, the CPER ETF rose from $21.88 to $24.89 per share or 13.8%. CPER does an excellent job tracking copper prices.
I am a buyer of copper at the current level, but picking a bottom when the trend is bearish is always challenging. Therefore, any buying will leave plenty of room to add on further declines over the coming weeks and months. Economic recovery in China, growing demand from green energy initiatives, and the increasing fundamental deficit in copper will likely lead to higher prices. The downside could be limited, while the upside price potential remains explosive.
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.
