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Copper – Commodity Analysis
Copper prices have risen today as Russia ended the military exercises around Ukraine and announced the return of some troops to base, easing fears about a potential invasion and boosting financial markets. Three-month copper on the London Metal Exchange (LME) has risen 0.21% after a 0.6% gain the previous day.
The LME Index over the last 3-years has often shared a close relationship with the movement of copper. Copper’s recent spike on the 10th of February amid a tight market at the LME was undone as the drums of war beat louder the following day. War of any length on European soil would have hampered expanding economies as the need for copper would have diminished. Following the move of an estimated 130,000 Russian troops close to the Ukrainian border, it was unclear how many units were being withdrawn to their bases and we await satellite imagery to show if any have actually been pulled back from the potential front-line.
When geopolitical pressures are excluded, the overall trend for most metals remains positive. In the near term, visible copper stocks are likely to remain at multi-year lows as physical buying in China picks up over the next few weeks once the economy returns to normal following the Lunar New Year holidays.
As of 2019, Chile was/may still be, the world’s top copper producer, producing 28% of the world’s copper and 22% of the world’s lithium. At the end of 2021, Chilean output was the highest in 2 years and nearing pre-pandemic levels. Chile’s copper export revenues were $3.870 billion in January. The decline in production into the summer of 2021 and then the subsequent rise from August onwards is a result of the successful conclusion of a strike, where Chilean miners had used the high prices of copper to negotiate a better deal for themselves. It is now the turn of the Peruvian miners to push their agenda in the world of base metals. The real cause of the tight market is a lack of investment and new developments.
The Commitment of Traders report shows a slight build in commercial producers hedging, but clearly since the summer of 2021, neither the speculators had been willing to significantly increase their long positions nor the producers to increase their hedges.
Other analysts have projected that global industrial production growth will decelerate from +6.9% in 2021 to +4.3% in 2022. Without some injection of stimulus from a Build Back Better plan or industrial levelling up across the world, copper could be in for more of the same in terms of price action this last 12-months.
A stronger dollar on expectations of faster removal of liquidity from the system and a weaker global risk-taking appetite due to the removal of liquidity will continue to cause price volatility in base metals, as we have seen during the NATO/Ukraine/Russia situation. Investors may be prompted to reduce their long exposure to commodities and base metals because of this.
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Technicals show that on a daily chart copper has swept the sell-side liquidity at the end of January and then like water in a bath, sept the buy-side liquidity last week. This is a typical fake out, shakeout and we’re waiting on the breakout. My bias would be back to the upside but considering the length of time copper has been going sideways, I would rather buy the 435.00 level on the ActivTrader platform and be as close to the previous significant low as possible, to reduce the risk.
Another reason for looking to go long on a buy the dip is the build-in short positioning by retail traders as seen in the ActivTrader sentiment indicator. The higher the sell-side positioning becomes, the more likely they are to get squeezed out.
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If buying the dip is more compelling than waiting for a potential further drop on the daily chart, intraday traders can use the imbalances within a trading range to have short-term entry and exits. The nature of a range means that every price gets tagged more than once, so if there had been an impulsive move on a headline news event, waiting for that candle body to get backfilled before heading off back in the direction of the impulsive candle is a great way to keep risk at a minimum too.
