Price movement recap – Historical and Forward curve
HISTORICAL (over last year)
The price of copper on the London Metal exchange from 10/29/2019 to 10/27/2020
Available from: https://www.lme.com/en-GB/Metals/Non-ferrous/Copper#tabIndex=2
The price on the Y-axis is in US dollar per tonne.
The big fall downs of January and March are provoked by the economic consequences of the COVID-19 crisis. China being the main importer of Copper, its initial lockdown hugely decreased its production- and investment- activities (so demand) while the production, especially the top ten copper producers, increased by 1% compared to the first quarter of 2019[i]. As the impact of the COVID did not occur at the same time between the supply (non-Chinese, mainly South America) and the demand (mainly China through its role as the main importer), the prices decreased drastically. The price of oil has also decreased during that period (Q1 2020)[ii], it has decreased the production cost of copper, and subsequently played a role in the decreasing price of that commodity.
FORWARD CURVE
Forward curve as of 10/28/2020 as per data of Chicago Mercantile Exchange
Available from: https://www.cmegroup.com/trading/metals/base/copper_quotes_globex.html?optionProductId=797&optionExpiration=797-X0
Price for one pound of copper in US dollars
The above graph represents the price of copper today based on future delivery. We can notice for the period from November to December 2020 a backwardation, (estimated low supply). The period from January to March 2021 represents a contango (estimated good/high supply) and the following periods until December 2021 represent that supply and demand are estimated to be stable.
Considering the increase of cases in Europe resulting in a market index falling by 2%, the demand for copper decreases with the declining economy[iii]. Nevertheless, China shared a possible availability of the COVID-19 vaccine as early as December resulting in a lift of the price of copper[iv].
The speculations regarding the outcome of the US elections, impacting the strength of the dollar, do impact the demand for copper since this commodity is traded in the US dollar currency.[v]
Illustration of the supply and demand dynamic of the commodity
LME Copper Warehouse Stocks level from 10/1/2019 to 10/28/2020
Available from: http://www.copperenews.com/copper-warehouse-stocks.asp
1year Copper Warehouse stock level.
The effect of Covid-19 started to be felt after 31 March 2020. Since the production companies had to lower the number of workers which led to smaller production. But since the economic activity was too slow, the slow over the production didn’t impact the stocks up until the economy started picking up again in June 2020, and we can notice a drop in the Copper stock from jun2020 to October 2020 due to these reasons and also the price rise of copper during that period. In October 2020 we can notice that the stock of copper is getting higher while the price is getting lower.
Recommendations: short (sell) or long (buy) for next 3 to 6 months
For November and December 2020 we have a backwardation we advise selling. Since the buyer is ready to pay a premium today for the product. For December our advice is to buy to make a profit in January by selling. The uncertainty planning with the COVID-19 pushes us to plan only for the 3 upcoming months.
Article by Ismail MODAFFAR IDRISSI, Tashi JARRON & Amélia REUSSER
[i] BASOV Vladimir, Largest Copper Producers Worldwide : Q1 2020 Overview [online], MINING NEWS & INTELLIGENCE, July 3rd 2020, consulted October 29th 2020, available from: https://www.minesandmetals.com/2020/07/largest-copper-producers-worldwide-q1-2020-overview/
[ii] TRADING ECONOMICS, Brent Crude Oil, consulted October 29th 2020, available from: https://tradingeconomics.com/commodity/brent-crude-oil
[iii] JONES Huw (Reuters), Europe trumbles 2% on COVID curbs and Brexit impasse [online], INVESTING.COM, October 15th 2020, consulted October 29th 2020, available from: https://www.investing.com/news/economy/asian-stocks-mixed-on-fading-us-stimulus-hopes-virus-concerns-2324823
[iv] P.SAEFONG Myra, Copper futures post highest finish in over 2 years [online], MARKETWATCH, October 20th 2020, consulted October 29th 2020, available from: https://www.marketwatch.com/story/copper-futures-head-for-highest-finish-in-over-2-years-11603213007
[v] Bloomberg, JPMorgan says Trump win could spur US Stocks, Dent Asia Assets [online], INVESTING.COM, October 28th 2020, consulted October 29th 2020, available from: https://www.investing.com/news/stock-market-news/jpmorgan-says-trump-win-could-spur-us-stocks-dent-asia-assets-2334707
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