Copper prices have been going nowhere fast. In an August 16 Barchart article, I asked if buying copper on price weakness is a winning strategy. I concluded that piece with the following:
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.
Nearby COMEX copper futures were at the $3.6610 per pound level on August 16. While the price was higher on September 11, copper is not running away on the upside.
Copper tried to rally but failed
After falling to $3.5860 per pound on May 24, nearby December COMEX copper futures rallied, making higher lows and higher highs until the price briefly eclipsed the $4 per pound level on July 31 and August 1.
The chart highlights that December copper futures ran out of bullish steam at $4.0380 per pound, the August 1 high. Since reaching $4.3330 in mid-January, copper futures corrected lower as the 2023 trend has been predominantly bearish. However, since the May 24 lows, copper has been trading sideways in a mostly $3.70 to $4.00 per pound range.
The long-term trend remains bullish
While copper has been consolidating over the past three months, the long-term path of least resistance suggests higher prices.
The chart dating back over six decades to the late 1950s shows copper reached an all-time high in 1988 at $1.6475 per pound. The price remained below the $1.65 level for seventeen years when it broke out on the upside in 2005. The last time nearby COMEX copper futures were under $2 per pound was briefly in January and February 2016. Copper rose to a record high of $5.01 in March 2022. Copper prices have made higher lows and higher highs over the past two decades.
The fundamentals are not bearish
Copper’s supply and demand fundamentals support stable to higher prices, with the potential for another leg to the upside for the red metal’s bull market. The following fundamental factors favor higher copper prices:
- Copper production has not kept pace with the rising demand. It takes around a decade to bring on new mining projects.
- London Metal Exchange copper inventories have been trending lower over the past years. Since mid-2019, they have dropped from nearly 340,000 to under 120,000 metric tons.
- Green energy initiatives require copper. Goldman Sachs analysts called copper “the new oil” because of its role in EVs, wind turbines, and other initiatives addressing climate change.
While the fundamentals remain positive, the long-term trend supports higher copper prices.
The dollar and interest rates have been weighing on copper prices
Since fundamentals and technicals agree, why are copper prices stuck in neutral and failing over $4 per pound? The trajectory of U.S. and worldwide interest rates has weighed on copper and other commodities. Combating inflation with hawkish monetary policy has increased the cost of carrying inventories, which tends to be bearish for raw materials prices.
Meanwhile, the U.S. dollar has risen over the past months, with the dollar index moving from below 100 to over the 105 level. The dollar is the world’s reserve currency and the benchmark for pricing most commodities. Copper is no exception as the LME forwards that trade in the U.K. price in dollar terms. Meanwhile, a rising dollar makes copper and other commodities more expensive in other world currencies. The elasticity of demand causes the nonferrous metal to decline when the price rises in local currencies, putting downward pressure on dollar-based copper prices. A stronger dollar is often a bearish factor for commodities.
The Chinese economy is the critical factor for the coming months
While rising interest rates and a strong U.S. dollar have been bearish for copper prices, the weak Chinese economy is the most significant factor pushing prices lower or preventing the red metal from resuming its upward trajectory. As the August 16 article mentioned, in 2022, “China was responsible for 55% of the world’s refined copper consumption.” The bottom line is that copper has held up well, considering China’s very concerning and weak economic data.
I favor adding copper to portfolios at the $3.80 per pound level. However, it is virtually impossible to pick bottoms in markets as prices can decline to illogical, irrational, and unreasonable levels that defy even the most bullish supply and demand fundamentals. Therefore, I leave plenty of room to add to my long position on further declines.
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.
