Copper: More To Come From This Bounce?
A few weeks ago I pointed out some unusual factors affecting the copper market. I also opined that the heavily oversold industrial metal was due for a major bounce.
I’ll show you how that analysis panned out in a minute. But first, let me quickly recap the situation…
As you may remember, extraordinarily high London Metal Exchange (LME) inventory levels had bears in control of copper in early 2013.
However, I went on to explain that just two commodity-trading firms controlled 70% of total LME copper inventories. It turns out these two firms, Glencore International PLC and Trafigura Beheer BV were (and still are) performing the “warehouse play”.
Hoarding by Glencore and Trafigura was creating an oversupply illusion in the copper market. On the surface, it looked as though demand for the red metal was plummeting. As a result, investors sent the price of the red metal to multi-year lows near $3.
But in actuality, copper was (and still is) hard to get. In fact, industrial consumers face long queues and pay a hefty premium over spot to secure copper supplies. That’s hardly a situation that warrants copper falling to multi-year lows.
In my opinion, much of the bearishness in the copper market in early 2013 was just a façade. And that’s precisely why I proposed the metal was set for a big bounce a few weeks ago.
Take a look at where copper trades now…
As you can see, May was a great month for bulls. The metal surged from $3.10 a pound all the way up to $3.35 a few days ago… an 8% jump in a matter of weeks.
What set it off?
Bullish US economic data forced bearish copper investors to unwind their massive short position.
As a matter of fact, the sudden surge on May 3rd (red arrow) coincides with the release of US unemployment data. Investors found that 165,000 positions were added in April as opposed to the consensus estimate of 153,000. That puts the April unemployment rate at 7.5%- much better than the 7.6% expected by economists.
And that’s not all…
Recent data shows the US housing market is coming back with a vengeance. New home sales rose 2.3% in April, far better than analyst estimates. As you may know, copper is an essential component in new home construction.
So with all these bullish factors in place, one has to ask…
“Does copper have further to rise?”
As nice as the recent bounce has been, the copper market still has one major headwind… China.
Unfortunately, economic data from the Far East country has been decidedly weak in May. And since China is the largest consumer of copper in the world (accounting for 40% of refined demand), their economic data trends are extremely important.
Most likely, copper will remain range bound at the $3.30 area for the foreseeable future. However, if Chinese manufacturing data improves in coming months, the red metal may test the $3.50 area.
Stay tuned to Commodity Trading Research for continued timely analysis of the copper market!
Until Next Time,
Justin Bennett
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Category: Copper, Industrial Metals
