Copper is a nonferrous metal that can serve as a barometer for the health of the global economy. Economic expansion tends to drive the price of the red metal higher and contraction lower. Moreover, the price of copper is particularly sensitive to the Chinese economy. Copper is an essential building block for infrastructure around the world. With the world’s leading population and second-largest GDP, China is the demand side of the equation for many commodities, including copper.
The trade war between the US and China has weighed on economic growth in the Asian nation. As the world’s leading economic powers exchanged protectionist measures, the threat of a global recession rose. The trade issue has caused markets to go through periods of optimism and pessimism over the past year, sending copper’s price higher and lower. In August, the market experienced the latest round of pessimism, but in mid-September, the outlook improved.
Freeport-McMoRan (FCX) is one of the world’s leading copper producers, and the price of its stock moved higher and lower with the red metal.
Pessimism sent copper to new lows in early September
In late 2017, the price of copper rose to a high at $3.3220 per pound on the nearby COMEX futures contract. In 2018, the peak price came in early June at $3.3155 per pound, a slightly lower high.
The price of copper began to fall in mid-2018 as the US faced off against China in a trade dispute that would escalate into a trade war in 2019. After rising to another lower high in mid-April at $2.9955 per pound, copper became a victim of the trade war as the US, and China exchanged a series of tariffs, retaliation, and other protectionist measures. As the trade war has significant ramifications for the Chinese economy, the slowdown weighed on the price of copper, which dropped to $2.5995 in early June. Some optimism over the potential for a trade deal returned in June through July lifting the price to $2.7930, things got ugly in early August.
At the very beginning of August, President Trump slapped new tariffs on the Chinese, and China retaliated. The price of copper fell to a low at $2.4675 per pound, the lowest price since June 2017.
A recovery, but the red metal needs to see follow-through
At the beginning of last week, nearby December copper futures were flirting with the $2.70 per pound level for the first time since July.
As the daily chart highlights, since making the low during the first week in September, the price of the base metal has made a comeback. On the short-term chart, price momentum and relative strength had risen into overbought territory where they turned lower as the price returned to just over the $2.60 level at the end of last week. At the same time, the total number of open long and short positions in the copper futures market has declined steadily. The open interest metric has dropped from 304,813 contracts in early August to 235,202 contracts at the end of last week or 22.8%. Falling open interest and rising price is not typically a validation of an emerging trend in a futures market. The metric dropped with copper and continues to decline as copper recovers. The bottom line is that the price direction of the industrial metal depends on the next development in the trade war and its impact on China’s economy.
The weekly chart illustrates that copper futures put in a bullish reversal trading pattern during the week of September 3 and followed through the next week. However, the buying ran out of steam last week as copper returned to the $2.60 level.
The dollar continues to rally as stocks begin to decline
The dollar and interest rates have created conflicting signals for the price of copper. Last week, the ECB cut the short-term deposit rate in Europe by ten basis points to negative 50 points. The ECB also told markets that it would restart its quantitative easing program to the tune of 20 billion euros of debt securities per month beginning in November. This week, the US Fed is likely to cut the short-term Fed Funds rate by 25 basis points, the second move since July 31. During the summer, the Fed ended its program of balance sheet normalization. Lower interest rates are supportive of the price of copper as they decrease the cost of carrying inventories and long positions.
The weekly chart of the dollar index shows that since February 2018, the index has made higher lows and higher highs. The latest peak came in early September at 99.33. At 98.22 at the end of last week, was a lot closer to the recent high than the February 2018 low at 88.15. The dollar index looks headed for a test of the psychological 100 level, which is not typically a bullish factor for the price of copper and other commodities.
As the chart shows, copper stockpiles rose from under 120,000 metric tons in March 2019 to over 330,000 tons and were at just over the 290,000-ton level at the end of last week. The LME is the world’s leading market for base metals, and the rise in inventories weighed on the price. Stocks hit the high at the beginning of September, the same time copper traded to its low. The price of the red metal has recovered as the stock level has moved lower.
Meanwhile, COMEX stockpiles had risen steadily from 37,000 to 42,437 tons over the past two months. However, over recent days they have begun to decline. When it comes to the copper market, there are lots of conflicting data these days. Trade between the US and China could be the only substantial factor that will impact the price over the rest of 2019.
More risk-off potential on the horizon
Last weekend, an attack on Saudi oil production that affected 5% of the world’s daily supplies was another reminder of the potential for wild volatility that faces markets across all asset classes over the coming days, weeks, and months. The price of crude oil moved over $6 per barrel higher than the September 13 closing level when markets opened on Sunday evening in the US. While the trade war between the US and China is an issue that can move markets, the face-off between the US and Iran in the Middle East is another factor that can cause periods of risk-off in markets across all asset classes.
Brexit is another issue that is a clear and present danger when it comes to risk-off periods. It looks like the next general election in the UK will be a second referendum on the UK’s divorce from the EU. Voters could express their frustration against the new Prime Minister as his political party was not able to fulfill the will of the people since the first vote in June 2016. Trade, Iran, Brexit, a general election in the UK, and the 2020 election in the US are all factors that could make for more than a bumpy ride in markets over the coming weeks and months. Copper’s price path reflects the global economy, and uncertainty is a potent cocktail for wide price variance in the red metal. During the global financial crisis in 2008, the price of copper futures on COMEX fell from $4.2160 in May to $1.2475 seven months later in December.
FCX – Make room to buy on dips
I continue to favor the prospects for Freeport-McMoRan, but the shares will move with the price of copper. Additionally, the company’s exposure to the Grasberg mine in Indonesia presents an idiosyncratic risk. Indonesia recently changed the deadline for its mineral export ban on nickel ores and metal to January 1, 2020. The market had thought it had two years before the ban would take effect. The price of nickel recently soared to over $18,000 per ton, the highest price in five years. Any nationalization of the copper-producing project at Grasberg could weigh on the price of FCX shares, which is undoubtedly a risk.
The chart shows that FCX shares magnify the price action in the copper market on a percentage basis. When the price of copper hit its high for 2019 at $2.9955 in mid-April, FCX hit its high for the year at $14.68 per share. The escalation of the trade war drove the shares lower to a low at $8.58 in late August right before copper hit its new low at $2.4675 per pound in early September. Copper declined by 17.6% from the 2019 high to the low. Meanwhile, FCX shares fell by 36.6%. FCX shares behaved like a double-leveraged product in the copper market.
I like the prospects for FCX shares and the price of copper. I believe that the US and China will eventually agree to a deal that lifts the price of both the red metal and the company’s shares. FCX pays a 1.91% dividend based on its September 20 price at $10.57 per share. I would be a buyer on any price weakness when it comes to FCX, leaving plenty of room to add during risk-off periods over the rest of 2019 and into 2020. I believe that a trade deal will eventually take the price of copper higher, but it could be a bumpy road until the two sides reach an agreement.
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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.