Copper's Short-Term Demand Woes, Long-Term Gaps
Copper is known as the electrifying metal.
Copper's warm glow and durable spirit, copper wires the heart of many a machine.
This reddish rarity has been super bullish in the recent past but less so now. That doesn't make it less investable. Just that nuanced investing approach is called for.
Outlook for copper has become mixed once more, with near term demand remaining downbeat given the continued slowdown in the Chinese property market and buildup in copper stock at SHFE. In the longer term, supply challenges risk pushing copper into a supply deficit with major copper miners Codelco and Anglo American facing supply challenges.
Given the mixed outlook, copper has continued to trade in a tighter price range over the past two months. Counter to conventional wisdom, a sideways market also presents opportunities for savvy investors. This paper describes the diverging outlook for the red metal and how investors can deploy a calendar spread using CME Micro Copper futures amid the diverging short and long-term outlook.
CHINESE COPPER INVENTORIES BUILD UP BECAUSE OF DEMAND SLOWDOWN
Chinese copper inventories have surged to one of their highest historical levels. Furthermore, inventories have been rising during the part of the year associated with drawdowns.
Lower demand is one of the factors behind the increasing inventories. The Chinese real estate sector is a major consumer of copper. With the ongoing slowdown in the sector, copper demand has been hit hard. Moreover, manufacturing sector in China is also experiencing a slowdown as China’s official manufacturing PMI dipped back into contraction in May.
Combination of property market slowdown and lower industrial activity is hindering copper demand in the near term.
Furthermore, refined copper production among Chinese copper smelters has remained near all-time high levels over the past few months.
BULLISH SUPPLY SIDE AND INDUSTRIAL RECOVERY POSE UPSIDE TO COPPER
While near-term demand outlook may be downbeat, the medium- and long-term outlook for copper remain bullish. In the medium term, higher demand from the rapidly growing PV (photovoltaic) manufacturing and EV industry are absorbing some of the higher copper supply.
While both industries have slowed in recent months, analysts expect them to recover. At their current pace of copper consumption, these industries are more than compensating for the slowdown in the property market.
Additionally, major copper miners, Codelco and Anglo American are dealing with lower production.
Codelco, the world's largest copper producer, reported a 9.4% decline in production in the latest quarter compared to the previous year. This decline is attributed to falling ore grades, water restrictions, union protests, and logistical challenges exacerbated by the global situation, including the pandemic and geopolitical tensions. Anglo American also announced plans to reduce its copper production in 2024 as part of a strategy to cut costs and adapt to market conditions.
Lower output from major copper miners is a cause for concern given the rapid pace at which the new energy industries such as EVs and PVs are growing as well as the rapid growth in data centers which require substantial amount of copper. With inadequate supply, copper supplies face the risk of being pushed into a deficit.
ASSET MANAGERS HAVE REVERSED VIEW ON COPPER BULLISHNESS
While asset managers had built up substantial long positions during the sharp rally in copper which took price to an all-time high, they have started to close some of those long positions indicating that in the near-term price may have run ahead of themselves.
Over the past week, September CME options have seen a buildup in puts while calls have declined. The November contract has seen a similar trend. However, the March 2025 contract has seen a surge in call OI.
In a similar vein, CME copper future’s term structure has shifted from a steep contango to backwardation over the last three months. However, over the past week, this has started to shift once more as premium of later contracts over front month has started to rise leading to a steepening term structure.
HYPOTHETICAL TRADE SETUP
Given the diverging outlook for copper in the near-term and later term, investors can express a view on the shift in term structure using a calendar spread consisting of CME Micro Copper futures.
The below hypothetical trade setup consists of a long position in Micro Copper futures expiring in March 2025 (MHGH2025) and a short position in Micro Copper futures expiring in August 2024 (MHGQ2024).
Investors can also deploy the same trade setup using CME full-size copper futures. The CME full-size copper futures also provide a margin offset for the trade, a calendar spread with the same contract can be deployed with maintenance margin of USD 2,500 as of 24/June.
The below hypothetical trade setup provides a reward to risk ratio of 1.43x.
Entry: 1.011
Target: 1.055
Stop Loss: 0.98
Profit at Target: USD 492
Loss at Stop: USD 342
Reward to Risk: 1.43x
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Copper's warm glow and durable spirit, copper wires the heart of many a machine.
This reddish rarity has been super bullish in the recent past but less so now. That doesn't make it less investable. Just that nuanced investing approach is called for.
Outlook for copper has become mixed once more, with near term demand remaining downbeat given the continued slowdown in the Chinese property market and buildup in copper stock at SHFE. In the longer term, supply challenges risk pushing copper into a supply deficit with major copper miners Codelco and Anglo American facing supply challenges.
Given the mixed outlook, copper has continued to trade in a tighter price range over the past two months. Counter to conventional wisdom, a sideways market also presents opportunities for savvy investors. This paper describes the diverging outlook for the red metal and how investors can deploy a calendar spread using CME Micro Copper futures amid the diverging short and long-term outlook.
CHINESE COPPER INVENTORIES BUILD UP BECAUSE OF DEMAND SLOWDOWN
Chinese copper inventories have surged to one of their highest historical levels. Furthermore, inventories have been rising during the part of the year associated with drawdowns.
Source – Bloomberg
Lower demand is one of the factors behind the increasing inventories. The Chinese real estate sector is a major consumer of copper. With the ongoing slowdown in the sector, copper demand has been hit hard. Moreover, manufacturing sector in China is also experiencing a slowdown as China’s official manufacturing PMI dipped back into contraction in May.
Source: TradingEconomics
Combination of property market slowdown and lower industrial activity is hindering copper demand in the near term.
Furthermore, refined copper production among Chinese copper smelters has remained near all-time high levels over the past few months.
Source: Bloomberg
BULLISH SUPPLY SIDE AND INDUSTRIAL RECOVERY POSE UPSIDE TO COPPER
While near-term demand outlook may be downbeat, the medium- and long-term outlook for copper remain bullish. In the medium term, higher demand from the rapidly growing PV (photovoltaic) manufacturing and EV industry are absorbing some of the higher copper supply.
While both industries have slowed in recent months, analysts expect them to recover. At their current pace of copper consumption, these industries are more than compensating for the slowdown in the property market.
Source: Reuters
Additionally, major copper miners, Codelco and Anglo American are dealing with lower production.
Codelco, the world's largest copper producer, reported a 9.4% decline in production in the latest quarter compared to the previous year. This decline is attributed to falling ore grades, water restrictions, union protests, and logistical challenges exacerbated by the global situation, including the pandemic and geopolitical tensions. Anglo American also announced plans to reduce its copper production in 2024 as part of a strategy to cut costs and adapt to market conditions.
Lower output from major copper miners is a cause for concern given the rapid pace at which the new energy industries such as EVs and PVs are growing as well as the rapid growth in data centers which require substantial amount of copper. With inadequate supply, copper supplies face the risk of being pushed into a deficit.
ASSET MANAGERS HAVE REVERSED VIEW ON COPPER BULLISHNESS
While asset managers had built up substantial long positions during the sharp rally in copper which took price to an all-time high, they have started to close some of those long positions indicating that in the near-term price may have run ahead of themselves.
Source: CME QuikStrike
Over the past week, September CME options have seen a buildup in puts while calls have declined. The November contract has seen a similar trend. However, the March 2025 contract has seen a surge in call OI.
Source: CME QuikStrike
In a similar vein, CME copper future’s term structure has shifted from a steep contango to backwardation over the last three months. However, over the past week, this has started to shift once more as premium of later contracts over front month has started to rise leading to a steepening term structure.
HYPOTHETICAL TRADE SETUP
Given the diverging outlook for copper in the near-term and later term, investors can express a view on the shift in term structure using a calendar spread consisting of CME Micro Copper futures.
The below hypothetical trade setup consists of a long position in Micro Copper futures expiring in March 2025 (MHGH2025) and a short position in Micro Copper futures expiring in August 2024 (MHGQ2024).
Investors can also deploy the same trade setup using CME full-size copper futures. The CME full-size copper futures also provide a margin offset for the trade, a calendar spread with the same contract can be deployed with maintenance margin of USD 2,500 as of 24/June.
The below hypothetical trade setup provides a reward to risk ratio of 1.43x.
Entry: 1.011
Target: 1.055
Stop Loss: 0.98
Profit at Target: USD 492
Loss at Stop: USD 342
Reward to Risk: 1.43x
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Full Disclaimer - linktr.ee/mintfinance
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