CPER Provides Copper Futures Exposure

Summary

• Copper prices have consolidated in 2023 and are up under 4%, but factors like China's economy, U.S. rates, and the U.S. dollar could create a bullish storm.
• Copper futures have made higher lows and higher highs since a correction in 2022, indicating a bullish trend.
• Rising demand for copper in green energy initiatives and limited new supply could support higher prices, especially if China's economy recovers.
• United States Copper Index Fund, LP ETF is the ETF product that tracks copper prices.

At the end of 2023, I highlighted the compelling case for higher copper prices on Seeking Alpha. In that piece, I wrote:

In 2023, copper prices consolidated and were up under 4% as of December 28. If China’s economy recovers, U.S. rates fall, and the U.S. dollar declines, it could create a perfect bullish storm for the infrastructure-building metal that is also a critical emerging energy commodity.

Nearby March COMEX copper futures prices were at the $3.9215 per pound level on December 28, 2023. At over $4 on March 21, copper futures increased from the late 2023 level.

Copper is critical for infrastructure building, making China a crucial factor in the path of least resistance of its price. Moreover, since copper’s role in addressing climate change has increased, the rising demand vertical makes the red nonferrous metal a bargain at near the $4 per pound level.

A record high in 2022 and a correction

COMEX copper futures rose to an all-time high in March 2022 when they briefly eclipsed the $5 per pound level.

The long-term chart highlights copper’s bullish price path since the turn of this century, which took the red nonferrous metal to a record peak two years ago, in March 2022. After a correction that took copper 37.1% lower to a $3.15 bottom four months later, in July 2022, the price was back above the $4 level in March 2024.

Meanwhile, the most liquid three-month copper forward contract on the London Metals Exchange reached $10,845 per ton in March 2022 before declining 35.9% to a $6,955 low in July 2022. At over the $8,900 per ton level on March 20, 2024, copper prices have made higher lows and higher highs since the July 2022 bottom.

Copper has consolidated- Bullish and bearish factors have held the price in a range

While copper prices have not challenged the 2022 record peak, the price action has been bullish since the July 2022 lows.

COMEX copper futures traded in a $3.54 to $4.3145 per pound range in 2023, with the LME three-month forwards in a band from $7,856 to $9,550.50 per ton. 2023 was an inside year compared to 2023 as the red metal did not rise to a new high nor fall to a lower low. Meanwhile, the ranges in 2024 have been $3.6860 to $4.1460 on the COMEX futures and $8,127 and $9,164.50 on the LME, making 2024 another inside year compared to 2023.

Copper’s price action has consolidation, which could mean that an eventual break higher or lower will lead to a significant move.

A move above $4.32 could ignite a bullish fuse

Technical resistance in the copper futures market is at just below the $4.32 per pound level.

The five-year futures chart shows technical resistance at the January 2023 $4.3145 per pound high. A move above that level could cause copper to challenge the next resistance level at the May 2022 $4.5675, a gateway to the March 2022 $5.01 record peak.

LME copper’s technical resistance levels are at the January 2023 $9,550.50 high and the April 2022 $10,580 peak, which are the path for a challenge to the March 2022 $10,845 high.

A rally that takes copper above the first resistance levels on COMEX futures and LME forwards could ignite a move to new record peaks.

Copper’s compelling bullish case- Stocks, green energy, production, the long-term trend

Copper’s compelling bullish case in March 2024 includes:

• Stocks- The LME is the most liquid market for global copper trading. LME inventories have declined over the past months and were at the 112,325 metric ton level on March 20. Falling LME inventories tend to support higher copper prices.
• Green energy initiatives- In 2022, Goldman Sachs called copper the “new oil” because of the metal’s green energy role. The rising number of electric vehicles, wind turbines, and other alternative energy technologies require increasing copper supplies, putting upward pressure on the demand side of the metal’s fundamental equation.
• Production- It takes the better part of a decade to bring new copper supplies online, and many of the new mining projects are in troubled countries, such as the Democratic Republic of Congo. The DRC was the fourth-leading copper producer in 2021; some of the latest mine projects are in the DRC. As producers struggle to keep pace with the rising demand, a fundamental deficit could extend throughout the rest of this decade.
• The technical trend- The trend in any market is always a trader or investor’s best friend. Copper’s path of least resistance has been high throughout this century despite the correction from the 2022 high. Meanwhile, copper futures and forwards have made higher lows and higher highs since trading at a $3.15 per pound bottom in July 2022.

The two primary factors weighing on copper prices over the past two years have been rising U.S. interest rates, which increase the cost of carrying copper inventories and production costs, and economic weakness in China, the world’s leading copper-consuming country.

China consumes over 50% of the world’s annual refined copper supplies. While China’s economy did not support copper prices in late 2022 and throughout most of 2023, economic growth in China could cause the red metal to suddenly rally in an explosive move that challenges the 2022 high.

CPER could have limited downside risk and significant upside potential

The most direct route for copper exposure is via the COMEX futures and options or the LME forwards and options. However, futures and LME exposure require unique accounts that are unavailable to many market participants.

Meanwhile, the fund profile for the United States Copper Index Fund, LP ETF (NYSEARCA:CPER) states

CPER’s top holdings include:

CPER holds long positions in three copper futures contracts, minimizing the roll risks.

At $25.35 per share on March 21, CPER had just over $144 million in assets under management. CPER trades an average of 162,155 shares daily and charges a 0.97% management fee.

On December 28, 2023, when I highlighted copper and the CPER ETR, nearby COMEX futures were $3.9215 per pound, and LME forwards were $8,624.50 per ton. At $4.0440 and $8,928 on March 21, 2024, the futures were 3.1% higher, and the forward had gained 3.5%.

Over the same period, the CPER ETF moved 4.7% higher from $24.21 to $25.35 per share as the ETF did an excellent job tracking copper prices.

If copper is on a path that breaks out and challenges the 2022 record high, CPER could be a golden ETF to add to your portfolio.