Copper Reacts to Tariffs and Inventories
The current level of technical resistance in the COMEX copper futures market stands at $3.4445, the late 2013 peak in the red metal. Reason three - Inventories weigh on the industrial metal
The level of inventories can have a significant impact on the price of copper. The London Metals Exchange is the world’s most liquid platform for trading copper. The exchange offers a 90-day forward product that attracts producers and consumers who can hedge or lock in prices for each business day of the year. The COMEX market and other futures exchanges do not offer as much flexibility for the industrial users of hedging products.
In late March, the amount of copper in LME warehouses exploded to the upside.
Copper in LME warehouses around the world moved from 317,750 tons on March 26 to a high of 388,175 tons on March 29.
As the 5-year chart of LME stockpiles shows, the inventory level moved to the highest level since 2014 which likely weighed on the price of the red metal over recent weeks.
At the end of Q1, total copper stocks on the LME stood at the 383,075-ton level which is close to the recent high.
Technical support for COMEX copper futures is at the $2.8750 level with resistance at $3.3220. The midpoint of the trading range since last September is at the $3.0985 per pound level, and copper was trading below that level on April 2, the first day of trading in Q2 2018. Southern Copper (NYSE:SCCO) is the world’s fifth-largest copper producing company, and the price of its stock tends to move with the price of the red metal. SCCO is almost a pure play on copper. Codelco, the world’s leading producer, is a state-owned company in Chile. Freeport-McMoRan (NYSE: FCX) is the second leading producer, but the stock of the company reflects the other commodities they produce. Glencore (OTCPK:GLNCY) and BHP Billiton (NYSE: BHP) are both diversified commodities producing companies. Therefore, SCCO could be the best proxy for the red metal when it comes to price action in the copper market. The price to earnings multiple for SCCO is high at 57.62 times earnings, but the company pays a 2.21% dividend. Copper is entering its fourth month of price consolidation as we head into the second quarter of 2018. The red metal has not violated its technical support. If trade tensions ease, we could see a challenge of the late December peak and a new high for the copper market which would be a continuation of the price pattern that took hold of the industrial commodities sector more than two years ago.