Copper – Commodity

Instrument description

Copper is regarded as the most widely used of all the metals and also less expensive as compared to other precious metals such a gold, silver, and platinum. Copper is also said to be the first and oldest metal used by humans thousands of years ago. Today, copper is considered an important metal due to its vast usage for different purposes.

Copper has a shiny reddish-orange appearance, and it is a soft and malleable metal that has a high electrical and thermal conductivity. Copper has properties similar to gold and silver that allows copper to be used effectively for industrial applications such as electric wiring, roofing, plumbing, and for industrial machines such as motors and generators. Copper has similar properties to gold and silver but is not used as currency as it is not a precious metal and costs less than gold and silver. However, copper is a popular commodity and traded like other metals.

Copper is extracted from underground mines and by recycling copper products. The total copper mining exceeds the value of 19 million tons. South Africa has the largest number of copper mines, but China leads as the largest producer of refined copper.

History of Copper

Copper is usually extracted from ore deposits that are found underground and sometimes in open-pit mines. A successful copper mining is one where a concentrated ore is turned into a fine material so that it is easy to remove the copper from waste material and refine the copper through a smelting process. Copper is said to be used since ancient times, but more than 90% of the copper is mined and smelted after the 1900s. Copper is mined in many countries across the world, and the top five countries producing copper per million metric tons (approximate) are

1. Chile – 5,600,000
2. Peru – 2,400,000
3. China – 1,600,000
4. United States – 1,300,000
5. Congo – 1,300,000

Chile is the leading global copper producer and has three of the world’s largest copper mines. The Escondida mine in the Atacama Desert, Chile, has a capacity of more than 1.37 million metric tons. Apart from the copper reserves, copper is also made by recycling old scrap metal. According to statistics, nearly 10% of annual global copper supply comes by recycling scrap metal into refined copper. Recycled copper also contributes to more than 30% of copper supply from the U.S. The recycled copper usually comes from copper smelters, brass mills, ingot makers, and refiners.

The demand for copper has grown steadily all over the world, and as most of the underdeveloped countries have started to prosper and improve their economy. The developing nations need a regular supply of copper to meet their growing infrastructure demands. The main consumers of copper include China, Russia, U.S, European Nations, and Japan. The large copper consuming countries also determine the copper demand in the future.

Copper is traded on all the major commodity exchanges that include New York Mercantile Exchange (NYMEX), London Metal Exchange (LME), Chicago Mercantile Exchange (CME), Multi Commodity Exchange (MCX), and Shanghai Futures Exchange (SHFE)

Supply and Demand of Copper

The supply and demand for copper is the main factor in determining the price of copper in the global market. The demand for copper will always remain high due to the wide uses of copper in numerous industrial applications. The industries that drive the demand for copper are

• Building construction: Copper is used commonly for wiring, weatherproofing and plumbing of residential and commercial buildings
• Industrial machinery: Copper is used in glassmaking, printing and engraving equipment
• Electrical products: Due to its efficient conductivity, copper is used in integrated and printed circuit boards. Copper is also used in electromagnets and vacuum tubes
• Transportation equipment: The electrical conductivity of copper is valuable in electric motors for automobiles
• Consumer Products: Copper is widely used for household items such as handrails, cooking utensils, doorknobs, and also in musical instruments.

A decline in the construction and electrical industry can result in a drop in copper prices. Similarly, a slowdown in the supply of copper from a copper-producing country can increase the copper prices in the global market. The trend of green technology and green solutions is on the rise, and massive growth in green technology can result in an increase in copper prices.

How to read the price change of Copper

Copper has played an important role in the growth and improvement of many sectors, such as electrical instruments, motors, and other numerous technological devices. The extensive uses of copper make it one of the popular hard commodity to trade. The price of Copper Future contract is given by U.S Dollar per pound.

If we examine the Copper Future Contact chart, we see the Index trades in a stable way and from the range of $2.600 per pound to $2.800 per pound from July 2019 to the last week of January 2020. Copper prices saw a decline from February 2020 and dipped to the lowest values in March 2020. The highest value recorded was $2.8368/pound on January 14, 2020. The lowest value recorded was $2.087/pound on March 23, 2020. After many months of constant fluctuations, the copper prices are seeing a Bullish trend and currently trade at $2.8537/pound. The Bid price is $2.8465/pound., while the Ask price is $$2.8435/pound.

How to trade Copper

There are several ways to trade copper, such as Exchange Traded Funds (ETFs), Futures, Options, CFD, Shares, and Copper Bullion. Copper trades on the Chicago Mercantile Exchange (CME) Globex, which is the world’s leading electronic trading platform that provides Futures and Options across a wide array of asset classes. The CME Globex allows users to trade virtually 24/7 (6 days) through electronic trading.

The symbol for Copper on the CME Globex is H.G.; the contract unit is 25000 pounds, and copper is price quoted in U.S cents per pound. Copper can also be traded by using Contract for Difference (CFD), and trading hours are 00:00 to 22:00 (in U.K.).

Trading copper requires careful execution of trading strategy considering the high volatility and selecting the right financial tool for trading. Apart from the derivative options such as Futures and CFDs, you can also buy shares of copper mining companies and be eligible to get dividends.

Trading copper through CFD may be the fastest way of benefiting from the volatility of the market. However if the market goes to the opposite direction you will loss faster. A CFD is a contract that enables you to use leverage and determine the price movements of the underlying asset without having to own the copper and having the trouble of storing copper. With CFDs, you can trade in both directions and potentially gain from both a Bullish and Bearish market trend. But apart from the opportunity to magnify your gains, there is also the concern of conservable losses if your prediction goes wrong, so a risk management tool maybe applied.

Buying stocks of big copper mining companies is also a popular way to try to profit from the copper industry. When the price of copper rises, the investors can magnify their profits. Some of the famous copper-producing companies include Freeport McMoran, BHP Billiton, Southern Copper, and Rio Tinto.

What causes the price change of Copper?

Copper is used in nearly every industry in every country, whether it is construction, electrical motors or equipment, and heavy industrial machines. Therefore, the price of copper is a good indicator of the overall economy. The four main factors that influence the price changes of copper are

• Supply disruptions

The political stability of the copper-producing country plays a crucial role in ensuring a constant supply of copper. Most of the copper comes from the South American countries, and any political unrest affects the supply chain management of copper. According to history, people have favored governments that have privatized copper mining, as seen in Bolivia in 2007 which disrupted the copper supplies. Chile, the leading copper producer, also has to deal with earthquakes that frequently affect the region.

• Emerging markets

Many of the developing nations are prospering and need to expand their infrastructure, which calls for an increase in the supply of copper to manage the housing and transportation sectors. According to statistics, Asian countries lead the demand for copper, and the price of copper is affected if there is an imbalance between supply and demand. China consumes more than half of the world’s copper and having reserves of its own; China still requires a constant supply of copper to continue the growth of its infrastructure.

• U.S. housing market

The housing industry in the U.S relies heavily on copper as it is used in electrical wiring, insulation, and roofing. The factors that influence the U.S housing demands include Gross Domestic Product (GDP), interest rates, and Nonfarm payrolls that affect the demand for copper. As building construction requires nearly half of copper demand, the investors should keenly watch the economic news and trend in the U.S to speculate on future prices of copper

• Substitution

The economic aspect of substitution always plays a vital role when it comes to trading and investing. Like every other commodity, there are substitutes of copper available in the form of other metals such as aluminum, iron, lead, and nickel. Aluminum is now used in electrical equipment and power cables.

Copper is mined in vast quantities from all over the world, particularly from South America and African countries. However, the global effects of Coronavirus have impacted the supply and prices of every commodity, including copper. But still, due to its essential usage, the demand for copper would remain and even increase after the Covid-19 issue is resolved in the coming months. The short term traders have an opportunity to try and take advantage of the volatility and price movements and increase their profits.

The information above is for education purposes only and cannot be considered as investment advice. Past performance is not reliable indicator of future results.