Columnist Amine Bouchentouf is a partner at Parador Capital LLC, an institutional advisory firm focused on commodities and emerging markets. He is the author of the best-selling “Commodities For Dummies,” published by Wiley. Amine is also the founder of Commodities Investors LLC, an advisory firm dedicated to providing insightful information on all things commodities.
Copper prices have certainly been on quite a rollercoaster ride this year. While prices started the year at around US $4 per pound they went as low as $3.30 per pound before rebounding back to $3.50. While we have seen some volatility this year, it certainly is fairly mild compared to the historical volatility copper has experienced during the last four to five years.
Prior to the 2008 financial crisis, prices were trading in a fairly tight range between $3 and $4 per pound. In 2008 however, copper demand was severely hit by the crisis and prices plummeted close to $1 per pound. 2009 saw a dramatic price rebound going from about $1 per pound to $4 per pound! The rally extended all the way to $4.50 in early 2011; since then, prices have been less volatile although they have been on a downtrend ever since Q1 2011.
It’s important to view current prices in their appropriate context in the lifecycle. Copper, at the end of the day, is a cyclical commodity and we need to understand where we are in the cycle in order to develop the best trading strategy.
The copper cycle
We’re currently in the part of the copper lifecycle where prices are trending sideways and searching for signals for the next trading pattern. Prices are in the $3.35 range and it appears that they may be heading lower. The reason? The global economic slowdown led by the European sovereign debt crisis is holding copper prices down.
There is now growing consensus among investors that Europe may not be able to survive as a single economic zone. As I write this report, members of the International Monetary Fund (IMF), the European Central Bank (ECB) and the European Commission (EC) are visiting Greece to determine whether the Greeks are in fact adhering to the bailout principles agreed to a few quarters ago.
As that’s going on, international investors have begun losing confidence in Spain and its ability to service its debt — both on a national and state level. In addition, many investors are now extremely skeptical that the $100 billion bailout of Spain’s bank will be sufficient. Furthermore, Italy is now under the spotlight as well with investors believing that Italy may be the next domino to fall.
All of this doubt with international investors is causing real concerns among industrial users of heavy metals, including copper. With so much doubt, industry is not displaying the confidence necessary to keep copper prices elevated. In fact, the Eurozone is the second largest purchaser of copper (right after China) and the economic slowdown is being painfully felt by copper sellers and producers.
With the outlook for the global economy fairly gloomy, it’s no surprise that the copper outlook is equally gloomy. Copper after all is called Dr. Copper by traders for its ability to measure and predict the health of the global economy. And Dr. Copper’s diagnosis right now isn’t very rosy. In fact, most of the metals in the industrial complex are down for the year due to concern about the global economic slowdown.
With a slowdown in China, a sputtering recovery in the United States and the mounting sovereign debt issues in Europe, it’s no surprise that copper prices are down for the quarter and for the year. The Commodity Investor believes that copper prices will remain in a narrow but definite downward trend for the rest of the year and potentially into 2013 as well. Until we get a resolution to the European debt crisis, it’s highly unlikely that copper — or any other industrial metal for that matter — will see significant demand from industry.
In addition, supply inventories remain elevated in many of the key producing markets such as China, the United States, Europe, Africa and the South American countries. With high inventories, decreased economic activity and an uncertain economic outlook the Commodity Investor recommends a wait-and-see approach to jumping back into copper. Prices will rebound eventually but we may see further downside and volatility before that crucial upward trend we saw between 2009 and 2011 is re-established.
In the meantime, I would keep a close eye on the European debt crisis. If there are signs of deterioration in the Eurozone, you should exit any and all copper positions you have because there’s a strong likelihood that they will only drop further. Similarly, if news of a slowdown starts coming out of China I would not initiate any new long positions in copper. In fact, I would only go long copper at this stage if three conditions exist. First, the Eurozone situation stabilizes; second, the recovery in the United States begins to take hold; and finally Chinese growth starts coming back. Outside of these three scenarios I would be very cautious in the copper markets right now.