Copper is one of the most widely used metals on the planet, and has been for more than 10,000 years. It’s history is rich and distinctive as its unique colour, and it is now indispensable in modern society.
In this infographic we explore why copper prices have increased by 4x over the course of 10 years. Major factors include lower ore grades, exploration pushed to higher risk areas of the globe, and growing Chinese demand.
The Fundamentals of Copper
Copper, copper, copper and even more copper! A surge in the levels of supply coupled with a fall in demand, has greatly influenced the price level of Copper in previous months. It is currently facing downward pressures from the market since data releases on weakening demand for the metal in China.
You may be wondering where the link lies between Copper and China? Well the main link derives from China’s massive industrialization process, taking into account the extensive use of this malleable metal in infrastructure such as electrical equipment, buildings, plumbing and ship building. China’s copper usage increased by 5.1 million metric tons (million mt) making it the world’s biggest consumer – according to USITC Executive Briefings on Trade. Therefore, changes in China’s domestic market conditions can markedly influence Copper’s world price.
The fall in China’s demand is rooted from the oversupply of copper within the market. Evidence has shown transportation of excess copper from China to other countries in Asia which are then stored in warehouses for future use.
Conflicts between “Fundamentals” and the true Fundamentals
Surprisingly we are in a situation, where despite the bearish sentiment aligned with Copper futures, the metal has managed to keep itself on steady grounds as it continuously holds above two month low. Could this be a sign of a steady pickup in demand?
If we take a look at the data produced by FastMarkets forecasts we can see that production and consumption had both risen since 2015, however with consumption positioned higher at 23.34 with an overall balance of -0.17.
This leaves us having to reconsider the extent of this “Supply surge” and falling demand. As traders and investors we need to be careful. Fundamental news release is not always the way the market is truly trending. Whether you’re a longer-term or shorter-term trader, watching the news is actually likely to work against you, rather than for you!
The weakness late last year caused by negative sentiment led to the market ignoring the supply responses that had started and that were added to in January, when China’s State Reserved Bureau agreed to boost stockpiles, and major Chinese smelters agreeing to drastically reduce production by about 20% for 2016. At this point the fundamentals begin to clash with each other and you are left wondering, which direction will copper actually break to?
The Technical’s of Copper
Let us take a quick detour into a more technical view in order to help ease your thought process a little bit. Feel free to click on the chart which should take you to the live price action of my technical analysis on Tradingview.
The outlook of copper towards 2017 strongly focuses on a potential position of a symmetrical triangle formation, often referred to as the coil. The two trend lines formed converge, which gives lead to a potential continuation of the heavily bearish sentiment since mid-August 2016. Although there have been instances where this symmetrical pattern has determined a trend reversal, the fundamentals previously taken into consideration show that a continuation is highly likely but we can’t be too confident. A firm break of the trend either side will definitely help to reassure a potential trade with copper.
Within the shorter time frames, there is evidence of consolidation with price action remaining between resistance level 2.0900 and support level 2.07500 over the past few days. Should we break from the trend early than expected, we may indeed be testing lower levels in this bearish outlook even before the start of 2017.
Copper is definitely one to keep on your watch list! Although we have seen weak movements in assets such as copper and falling prices, which have led to a general negative sentiment around investors. There could definitely be scope for major movements in the following year as institutional investors begin to take advantage of the lower prices before major volatility.
Credit Emmanuel Akanbi