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Copper Rally Comes Into the Limelight

8 March 2016 in Trading Ideas

Key Takeaways

  • Copper prices have hit a four-month high amid an overall growing optimism toward beaten-down commodities.
  • Recent economic data from both the US and China support that demand for the metal's industrial uses will grow more than anticipated.
  • Cutbacks by mine operators could mean tighter supplies over the near term, further helping prices.
  • Motifs mentioned: Dr. Copper

Gold isn’t the only commodity rewarding investors these days.

Last week, FT.com reported that copper prices rose above $5,000 a ton for the first time since November amid renewed optimism that commodity markets overall may have found a bottom after their worst slump in more than a decade.1

The metal surged more than 5% in the past week alone.

Prices of copper mining stocks have risen in sync – the Dr. Copper motif has gained 38.7% in the past month. In that same time, the S&P 500 has gained 6.4%.

Over the last 12 months, the motif has lost 30.2%; the S&P 500 is down 3.4%. Indeed, copper’s rise has been fast and relatively recent – in January, it had fallen to its lowest level in 2009.

So, what’s changed to bring about this rosier outlook?

As is typical with copper, the answer appears to rest in investors’ growing optimism toward both the US and China.

Copper stockpiles are shrinking as mine owners have cut back to help erode a global production surplus. This signals tighter supplies at a time when a robust US labor market is helping to support the consumption outlook. American companies added more workers than projected in February, indicating the job market remains strong as the labor force grows at the fastest pace in more than a decade, government data cited by Bloomberg showed last week.2

Future data releases, especially on housing, could heavily influence copper prices. As the Hindu Business Line pointed out, the US housing sector is one of the world’s major users of copper.3

The International Copper Study Group last year had forecast the copper market to reach a deficit in 2016. Refined copper production was expected to increase by 2% this year to 23.12 million tons, while usage was estimated to increase by 3% to 23.3 million tons in 2016, ending the year with a deficit of 0.13 million tons. The ICSG is scheduled to meet this week for its next forecast — a higher revision this week in the deficit target for 2016 could boost copper prices further.

In China, the world’s biggest user of copper, government leaders have taken measures to help shore up economic expansion, and the country plans to increase its deficit as it shells out more funds to underpin growth, according to a Bloomberg report.

Chinese Premier Li Keqiang just announced a 6.5%-7% expansion goal, down from an objective of about 7% last year. The plan reflects the country’s determination to maintain growth and put off confronting its debt, Bloomberg noted.

Last week’s runup in copper also came as China is set to start its National People’s Congress. Chinese stocks just had their best week of the year ahead of the meeting, which will see the approval of the next five-year plan for the country, FT.com reported. Investors will be looking for further signs of stimulus that could boost residential construction.

Interestingly, the current bullishness surrounding copper has largely drowned out a recent contrarian take by Oscar Landerretche, the chairman of Codelco, Chile’s state-owned producer. Bloomberg reported last week Landerretche said that a global surplus will persist through this year and next, and dismissed suggestions that a recent gain in prices was likely to endure.

The prevailing sentiment, however, seemed to be crystallized by Harish Sundaresh, a portfolio manager and commodities analyst for Loomis Sayes, who told Bloomberg, “the market is not too worried about surpluses, but we are very worried about the Chinese macro story.”

As long as the good feelings remain toward that story, optimism toward copper prices – and the stocks of miners — could stay intact.

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Investments in commodity-related products, such as precious metals, agricultural products, and oil may be subject to greater volatility and liquidity risks than investments in traditional securities. Commodity-related products can be significantly impacted by underlying commodity prices, world events, government regulations, and economic conditions, which can dramatically affect the value of an investment.

Performance returns, including 1-month Return/Return Since Inception/1-year returns indicates the performance of this particular motif over that stated period of time as of the date provided. Performance is quoted for informational purposes only, however, there is no guarantee those returns will continue. See how we calculate returns.

  1. “Copper breaks through $5,000 a tonne,” ft.com, March 4, 2016.
  2. Marvin G Perez, “Copper Bears Turn Into Bulls Before Prices Rally Most Since 2011,” Bloomberg.com, March 6, 2016, http://www.bloomberg.com/news/articles/2016-03-06/copper-bears-turn-into-bulls-before-prices-rally-most-since-2011.
  3. Gurumurthy K, “Rally in copper gathers momentum,” thehindubusinssessline.com, March 6, 2016, http://www.thehindubusinessline.com/portfolio/real-assets/rally-in-copper-gathers-momentum/article8320895.ece.

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