Copper- Higher Lows And Higher Highs Continue

Before 2005, COMEX copper futures never traded above the $1.65 per pound level. The last time the red metal’s price touched the $1.65 level was in 2009. The world’s leading copper producer is Chile, and China is the top consumer. Electrical equipment such as wiring and motors, construction projects, industrial machinery, pipes, tools, and musical instruments are some of the traditional uses of copper. 

Copper’s price has made higher lows and higher highs since the turn of this century. The most recent rally took the price from $2.0595 in March 2020 to over $5 per pound in March 2022. 

The long-term trend remains bullish

From the late 1960s until 2004, $1 per pound was the pivot point for the copper futures market. 

The chart shows that copper’s price took off on the upside in 2005 and has not looked back. Copper never returned to test the $1 level and has made a series of new all-time highs over the past years. The latest new peaks came in May 2021 and March 2022. The long-term trend in the copper market remains bullish in early April 2022, with the price above the $4.70 per pound level. Copper also trades on the London Metals Exchange. The LME is a forward market, allowing more flexibility for delivery. Producers, consumers, and other market participants tend to favor the LME over the COMEX as three-month forwards expire each business day. 

The chart shows the bullish pattern in three-month LME copper forwards over the past two decades. The price at over the $10,350 per ton level at the end of last week was close to the most recent new all-time high at $10,845.

Copper’s become an energy commodity

Addressing climate change opened a new demand vertical for the copper market. The red nonferrous metal is critical in EV engines, wind turbines, and other green energy initiatives. 

The increasing demand for copper has created a catch-22 as copper mining, smelting, and refining are energy-intensive. 

Meanwhile, increasing the world’s copper supply is a long-term project. It takes eight to ten years to move a copper mine from the feasibility to the production stage. A fundamental deficit has developed as EV manufacturers, other green energy companies, and traditional copper consumers increase their consumption. 

Source: Kitco/LME

As the five-year LME copper warehouse stocks chart highlights, inventories have declined from over the 375,000-ton level in mid-2018 to below 94,000 tons at the end of last week. Falling stockpiles are a sign of increased demand for the metal. 

Goldman Sachs forecasts a continuation of the bullish trend

Copper’s role in green energy initiatives caused Goldman Sachs to call the nonferrous metal “the new oil.”
The investment company believes that copper’s price is heading for the $15,000 per ton level by 2025, putting COMEX copper futures over $6.80 per pound. 

The supply-demand deficit will remain in place until global mining companies can bring new production on stream to balance the fundamental equation. Given the process of bringing new mines into the production phase, we could be looking at 2030 before significant output increases. Moreover, addressing climate change could cause existing mines to see production declines. The leading mining companies have made net-zero carbon emission pledges and are scaling back their emissions, impacting mining, refining, and smelting output. 

Bull markets often rise far past analysts’ expectations

Bull markets rarely move in straight lines, and periodic selloffs and corrections are the norms. Copper reached an all-time high at nearly $4.90 per pound in May 2021.

The chart illustrates that three months later, in August 2021, copper briefly probed below the $4 level before consolidating and digesting the move to the new high. It took until March 2022 for the copper futures market to build cause to move to another record peak at over the $5 per pound level. 

Bull markets may suffer brutal periodic corrections, but they also tend to take prices to far higher levels than analysts expect on the upside. Calling tops in markets is a challenge as bull markets tend to take prices to irrational, illogical, and unreasonable levels. A speculative trend-following frenzy often occurs in markets across all asset classes. 

CPER is more liquid than JJC

I believe that copper is heading higher. Calling a top is more about ego than rational analysis, and the path of least resistance of prices is a function of market sentiment. 

The most direct route for a risk position in the copper market is via the COMEX futures and futures options or the LME forwards or forward options. 

The US Copper ETF product (CPER) and the iPath Series B Copper Subindex TR ETN product (JJC) provide alternatives to the futures or forward copper market for investors interested in copper’s bull market. 

As of Friday, April 1, the JJC ETN was at the $23.68 level, with over $108.8 million in assets under management. JJC had an average daily volume of 89,435 shares changing hands and charges a 0.45% management fee. Nearby COMEX copper futures rose from $3.98 on August 19, 2021, to a high of $5.01 per pound on March 7, 2022, a 25.9% increase. 

Over the same period, the JJC ETN moved from $20.16 to $24.87 per share, or 23.4%. 

At $28.65 per share on April 1, the CPER ETF had $271.660 million in assets under management and traded an average of 241,500 shares each day. CPER charges a 1.08% management fee. 

The CPER ETF rose from $24.60 to $30.12 per share or 22.4% over the period when copper moved from the August 2021 low to the early March 2022 high. 

While the JJC ETN is less expensive and offered a better return, CPER is a more liquid product, which would likely provide investors and traders a tighter bid-offer spread when the price action becomes highly volatile. JJC and CPER only trade during hours when the US stock market operates. Copper trades around the clock, with the most liquidity during hours when the LME is operating, which only slightly overlaps with US stock market hours. CPER offers more liquidity, while JJC posted a better return. Meanwhile, past performance is never a guarantee of futures results. I am bullish on copper but expect a bumpy ride.