A Guide to Investing in Copper
When people think about trading or investing in metals, undoubtedly their mind will firstly turn to gold and silver before even considering the red metal, copper.
Whilst copper does not share the same status or appeal as shiny precious metals, it plays an important role in our lives and is the third most consumed industrial metal in the world. In this article, we will examine this versatile commodity, take a look at the avenues of investing in copper and step by step instructions on how you can get started with Admiral Markets!
What Is Copper?
Copper is an incredibly versatile base metal, which is very important in the modern world and its continued development. It is largely used in the building and manufacturing industries due to its excellent conductivity of heat and electricity. In fact, copper is the best non-precious metal conductor of electricity, which explains why it is so popular in these industries.
Copper piping and wiring runs through our homes, a small automobile has around 20kg of copper, helping it run - and the world’s telecommunication networks rely heavily upon it.
Due to its usefulness in building and manufacturing, copper’s price enjoys a positive correlation with economic growth and is generally seen as a reliable indicator of global economic health.
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What Affects the Price of Copper?
As with any freely exchanged good, the price of copper is determined by the balance of global supply and demand. Various factors can affect levels of supply and demand, some of which we will explore in more detail in the following sections.
However, before we look at individual factors, it is useful to understand a bit more about the landscape of global supply and demand when investing in copper.
Chile and Peru are the two biggest producers of copper in the world, accounting for a combined 40% of global production in 2019.
China, who was the third largest producer of copper in 2019, accounting for around 8% of global production, is by far the largest consumer of copper in the world, responsible for 51% of global consumption in 2019.
These figures tell us that the price of copper can be largely influenced by what is happening in just three countries. Chile and Peru on the supply side and China on the demand side.
Therefore, if you see any news which may affect the copper supply in Chile or an economic announcement which may affect demand in China, you can expect the price of copper to react accordingly.
The performance of copper is positively correlated with economic growth and it is, therefore, generally viewed as a barometer of global economic health, earning it the nickname “Doctor Copper”.
In times of economic boom, countries build and manufacture more and therefore demand for copper increases. On the other hand, when the global economy slows down, these activities also slow and demand for copper decreases.
Given what we know about China’s large demand for copper, its price can be particularly sensitive to China’s economic performance, as any change in their demand has a significant impact on global demand as a whole. As such, copper prices tend to react with increased volatility to Chinese economic announcements.
On 18 January 2021, China released their Q4 2020 GDP data, which showed their economy had grown 6.5%. This figure was higher than anticipated and meant that, despite the economic turmoil of 2020, China was the only major economy to record positive economic growth for the year.
In the chart below, we can see that the price of copper reacted positively to this news, appreciating over 1.8% in the course of seven hours.
Depicted: Admiral Markets MetaTrader 5 - Copper M30 Chart. Date Range: 14 January 2021 - 20 January 2021. Date Captured: 11 February 2021. Past performance is not necessarily an indication of future performance.
With a significant proportion of global production taking place in just two countries, a natural disaster in either region can cause disruption in supply which may have a knock on effect on price.
For example, on Saturday 27 February 2010, a severe earthquake struck Chile, affecting a large portion of the country. As a result, production at four major mines was suspended which affected about 20% of the country’s copper production capacity.
In the chart below, we can see that when the commodity markets reopened on Monday 1 March 2010, copper opened with prices more than 3.5% higher than they had closed on Friday.
Depicted: Admiral Markets MetaTrader 5 - Copper Daily Chart. Date Range: 10 November 2009 - 23 June 2010. Date Captured: 11 February 2021. Past performance is not necessarily an indication of future performance.
Although copper enjoys better conductivity of heat and electricity than other metals, as well as superior ductility (its ability to be easily shaped and drawn), there are substitutes for the metal which, despite their inferiority, start to look more appealing when copper prices are high.
This availability of substitute metals, such as aluminium, can cause a decrease in demand, and subsequently price, of copper when its price becomes too high.
For example, in the chart below, the red line indicates copper’s historic high, in February 2011, of 464.95 USX (US cents) per lb, or $10,250.40 per metric ton. At the same time, aluminium was trading at around $2,500 per metric ton.
Although copper is no doubt superior to aluminium in terms of conductivity, a price gap of around $7,750 per ton can start to make the cheaper metal more appealing to consumers, which can lead to a fall in demand and, subsequently, price of copper.
Depicted: Admiral Markets MetaTrader 5 - Copper Weekly Chart. Date Range: 30 August 2009 - 11 February 2021. Date Captured: 11 February 2021. Past performance is not necessarily an indication of future performance.
How to Invest in Copper
Other than investing in copper by purchasing the physical commodity, which presents certain logistical issues such as storage, there are a variety of ways in which you can gain exposure to the copper market. Below are a few examples, which we will look at more closely in the following sections.
- Exchange-Traded Funds (ETFs)
- Contracts For Difference (CFDs)
One way of investing in copper is to do so indirectly by purchasing shares in a company which operates in this field, either through exploration, extraction or developing copper.
When the price of copper increases, the companies involved will undoubtedly benefit, potentially leading to an increase in share prices. However, when it comes to investing in a company, there is a lot more to it than just wanting to gain exposure to the field in which they operate, you should also be looking deeply into its fundamentals. Furthermore, there is no guarantee that all companies involved in the copper industry are capable of matching any potential gains in the price of copper.
Exchange-Traded Funds (ETFs) are another method of indirectly investing in copper.
An ETF is a publicly listed fund which is designed to track the movement in price of an underlying asset or assets. Each ETF varies in how they track the price of an asset. When it comes to commodities, the ETF may invest heavily in the physical commodity, hold shares in companies involved in the relevant industry, trade derivative instruments or do a mixture of these things.
It should be noted that buying and selling ETFs will usually incur a commission, whilst holding a position in one will be subject to a small management fee. Moreover, some copper ETFs may suffer from low liquidity, which could cause difficulties when looking to buy or sell.
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A copper futures contract is a legally binding agreement between two parties to exchange the commodity on a specific date in the future at a predetermined price.
Copper futures are exchanged on the London Metal Exchange, the Multi Commodity Exchange, the Shanghai Futures Exchange, the Tokyo Commodity Exchange and the Commodity Exchange Inc (COMEX), which is a member of the Chicago Mercantile Exchange (CME) Group.
Investing in copper futures allows traders to speculate on the price of copper without ever taking ownership of the physical commodity, provided they close their position prior to the contract's expiration.
Copper futures contracts have predetermined specifications depending on which exchange they are traded on. For example, a copper futures contract on the CME Group is equivalent to 25,000 lbs and its price is quoted in USX per lb. This presents one of the drawbacks of trading copper futures, which is that you are bound by contract sizes which are large and it is not possible, for example, to trade a fraction of a contract.
Copper options grant the buyer the right, but not the obligation, to exchange the commodity at a predetermined price on or before a certain date in the future.
Options suffer from time decay and are only successful if the price of the underlying asset reaches a certain level by the expiration date. If the price does not reach this level then the option will expire as worthless, which naturally presents a significant risk to anyone investing in copper via options.
Copper Contracts For Difference (CFDs) represent a contract between two parties which agrees to exchange the difference in price of the commodity between the time the contract is opened and closed.
Investing in copper using CFDs means that, like with futures and options, the trader is not required to take or deliver ownership of the physical commodity itself. CFDs, futures and options all also benefit from the use of leverage.
Furthermore, CFDs on commodities do not have an expiration date, meaning that a position can be maintained for as long as the trader desires. However, it should be noted that CFDs are subject to swap fees, which is interest charged on a position left open overnight.
How to Start Investing in Copper With Admiral Markets
With Admiral Markets it is possible to trade CFDs on both copper and copper futures contracts. Unlike copper CFDs, copper futures CFDs naturally share an expiration date with the underlying futures contract in question.
In order to start investing in copper CFDs with Admiral Markets, you will need to follow these steps:
- Open a Trade.MT5 account with Admiral Markets
- Download the MetaTrader 5 trading platform
- Open MetaTrader 5 and press Control + M to bring up the ‘Market Watch’ window
- Press Control + U to open a window displaying the symbols which are available to trade
- Select ‘Metals’ on the left of the screen, highlight ‘Copper’ and press ‘Show Symbol’ - as seen in the image below:
Depicted: Admiral Markets MetaTrader 5 - Symbols
- Locate the symbol for copper (COPPER) in the Market Watch tab, right click on it and press ‘Chart Window’ to open its price chart
Depicted: Admiral Markets MetaTrader 5 - Copper Daily Chart. Date Range: 12 October 2018 - 5 February 2021. Date Captured: 7 February 2021. Past performance is not necessarily an indication of future performance.
- In order to place a trade, right click anywhere on the chart, select ‘Trading’ and then ‘New Order’ to bring up the dialogue box shown below
Depicted: Admiral Markets MetaTrader 5 - New Order
You should now be familiar with copper, what factors can affect its price and how it can be invested in.
Despite not possessing the same status as other metals, it should be clear that copper is an incredibly important material in our world and, as the world continues to grow, our demand for copper is forecast to continue to grow as well.
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With a Trade.MT5 account from Admiral Markets, you can trade CFDs on copper, gold, silver, coffee and many other commodities, whilst enjoying free use of the world’s number one multi-asset trading platform, MetaTrader 5! Click the banner below to open your account today:
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About Admiral Markets
Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.