Copper Moves Above The $3/Pound Level

Copper is one of the most closely watched industrial metals. The nonferrous metal that trades on the London Metals Exchange and the COMEX division of the Chicago Mercantile Exchange has been a leader in the industrial commodities sector for decades. The red metal’s nickname, Doctor Copper has a long history of diagnosing the state of the global economy. Over recent weeks, we have seen a pickup in the prices of many staple commodities. The price of iron ore, the primary ingredient in steel has moved from around $52 per ton in the middle of June to over the $75 level as of Aug. 24. Crude oil has recovered from lows of $42.05 per barrel on the nearby NYMEX futures contract on June 21 to over $47.50. The Baltic Dry Index, a measure of freight rates for dry bulk commodities, has moved from 820 on July 10 to 1222 as of Thursday, Aug. 24.

There are two primary reasons for the strength in the prices of many industrial raw materials that are the building blocks of infrastructure and staples for construction over recent weeks. First, global economic conditions continue to improve while the U.S. dollar has declined in value and interest rates have moved to the downside in the United States. The dollar is the reserve currency of the world and the benchmark pricing mechanism for most raw materials. Second, and perhaps more importantly, China has been on a buying spree in the commodities market over recent weeks. As the world’s most populous nation with a growth rate of over 6%, the Chinese are the most influential factor when it comes to the path of least resistance for commodities prices.

This week, copper has moved above $3 per pound for the first time since November 2014. The price of the red metal traded to its all-time peak in 2011 when the price hit $4.6495 per pound at which point in spent the next almost five years making lower highs and lower lows.

A bottom in January 2016

After moving steadily lower since February 2011, the price of copper finally found a bottom in January 2016 at $1.9355 on the active month COMEX futures contract. Source: CQG

As the weekly chart highlights, $1.9355 wound up being the low for the copper market at the start of 2016. Most industrial commodities prices found their bottoms in late 2015 and early 2016. Other base metals, including aluminum, lead, zinc, nickel, and tin traded their lows when copper was at its nadir. The price of crude oil traded down to $26.05 in February 2016, and iron ore hit its bottom at around $38 per ton at the end of 2015.

Copper and other industrial raw materials prices spent much of 2016 consolidating at levels above their lows.

Consolidation leads to a breakout in November 2016

As the weekly chart shows, COMEX copper futures traded in a range from just below $2 per pound to $2.3145 until early November. The ten-month price consolidation above the lows prepared the red metal to break out to the upside following the U.S. Presidential election on Nov. 7, 2016. On the campaign trail, President Trump pledged to rebuild U.S. infrastructure which caused many raw material prices to rise in the wake of his victory. During the week of the election on Nov. 7, 2016, copper rose above technical resistance at $2.3145 per pound and climbed to a high of $2.8230 by the middle of February 2013. During ten months of consolidation throughout much of 2016, copper built a base from which to move higher.

Another consolidation and a new high in July

The rally in copper that began at the lows in early 2016 has followed a pattern that included periods of consolidation. Source: CQG

As the daily chart illustrates, after the February highs September COMEX copper futures traded in a range from $2.4850 to just under $2.85 for five months. In July, the nonferrous metal once again broke above the top end of its trading range and has since been making higher lows and higher highs.

$3 in August

Copper first traded above $3 per pound on Aug. 21, but it only closed above the key psychological level on Thursday, Aug. 24, when the price traded up to $3.0480 per pound. At that level, copper was at the highest level since November 2014. Source: CQG

As the monthly COMEX copper chart shows, the next level of technical resistance now stands at the July 2014 highs of $3.2745 per pound. Open interest, the total number of open long and short position in the COMEX futures market has been increasing with the price of the red metal. The metric has moved from just over 161,000 contracts in February 2016 to its most recent level at over 329,000 contracts. The technical indicator has more than doubled since copper was close to its lows and rising open interest alongside increase price tends to validate a bull market in a commodities futures market.

Momentum in the base metal continues to be higher, although it has climbed to an overbought condition on the monthly chart. The current trend in copper is likely to take it to the next resistance level which is just under $3.30 per pound. Over recent weeks, LME stocks have been moving lower which is also supportive of more gains in the price of the red metal.

Inventories have moved lower, and it looks like clear sailing to the next technical resistance level

Over recent months, copper has displayed a strong inverse correlation with movements of stocks on the London Metals Exchange. As the chart displays, LME inventories have dropped from 305,875 metric tons on July 25 to 249,525 tons as of Aug. 23, a drop of 18.4%. Over the same period, the price of copper has appreciated from $2.7345 to Thursday’s high of $3.0480 per pound, an increase of 11.4%.

It is likely that the current trend in the red metal will continue to take it higher and right now $3.2745 is a target for the price of copper. The strength in copper is likely to support other industrial commodities, including the other base metals that trade on the LME, iron ore, and even crude oil all of which are staples when it comes to building infrastructure. We are currently in the midst of an industrial boom in the industrial commodities sector and a continuation of Chinese buying and a weak dollar likely hold the key to whether copper will keep on moving up to its next peak or whether we will once again see a period of consolidation which could last for several months.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.

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