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Copper has taken a wild ride from May 30 through June 20. The price moved 10% higher and 10% lower over the period. Anyone who went on vacation at the end of May and returned on June 20 would not blink an eye at the copper market as the price went nowhere fast. However, for those of us who watch each tick in copper for clues about the global economy and demand for industrial metals, trading copper over the past fifteen sessions was like riding a roller coaster or a wild bucking bronco. Copper took an elevator up and the same one down over the period.
Commodities typically take the stairs higher and the elevator to the downside, but when it comes to the red metal over recent weeks, there were no stairs. When copper was close to $3 per pound at the end of May, shorts found themselves scrambling to cover risk positions. As it dropped from over $3.30 longs bailed out of the market just as fast. For a market that has not moved over the past three weeks, copper broke a lot of hearts and lots of bankrolls.
Escondida pushed the price to under one cent off the highs
Last year, the loss of production from Escondida, the world’s largest copper producing property in Chile, caused the loss of approximately 156,000 tons of the red metal and cost BHP around $1 billion in revenues. The threat of a strike at the end of May and beginning of this month at the Chilean mine caused the latest buying in the copper market.
As the daily chart of July COMEX copper futures highlights, the price of the red metal rallied aggressively from the May 30 low at $3.01 per pound to highs of $3.3155 on June 7. The high was just 0.65 cents shy of the level of critical technical resistance on the longer-term charts which was at $3.3220 per pound in late December 2017. Copper’s rally to that peak began in January 2016 when the price of the nonferrous metal found a bottom at $1.9355, and since then, the copper futures market has yet to violate a critical support level on the weekly chart which currently stands at the late March low of $2.9460. Copper has made higher lows and higher highs over the past two and one-half years, but the latest attempt to reach a new peak failed at just shy of the late 2017 high for the base metal.
Easy come, easy go
As the daily chart shows, copper rallied in early June on heavy volume on the potential for a labor action at Escondida. However, after the union presented demands and BHP and the leaders representing the workers agreed to sit down and negotiate, the price stopped its upside trajectory. In a case of easy come, and easy go, copper gave up all of its gains from June 7 through June 21 and fell to a low of $3.0135 on Friday, June 22. The massive volume on the upside translated into the same level of volume on the downside and compared to the price on May 30; copper has gone nowhere fast after a rollercoaster ride of volatility in the futures market for the red metal.
We rejected highs, what will happen at lows?
Like often occurs in markets, when copper was on its way to the recent high, it looked like the red metal would break to a new and higher level in a continuation of the bull market that commenced at the start of 2016. However, the failure in price that has sent it back down to the same level it was trading at on May 30 before all of the bullish price action now makes copper look like it is going after the technical support level at just below the $2.95 per pound level on the continuous futures contract.
As the weekly chart illustrates, open interest in the copper futures market rose with the price in early June, which is typically a validation of the bullish price action in a futures market. However, after not following through on the upside and falling to the price where the rally began, the metric has declined, which is typically not a bearish sign in a futures market. The theory behind open interest did not work on the upside, and time will tell if it works on the downside and copper can find a bottom at a higher level than its critical support level. Price momentum has shifted lower on the weekly chart after the latest price failure, and the $2.9460 level is now in play for the copper market. If the nonferrous metal falls below, it will signal an end to the bullish trading pattern that has been in place for the past thirty months. While copper fundamentals remain robust given economic growth, and the technical picture supports a higher low, an exogenous event that is weighing on all commodities prices these days could spell problems for the price of the red metal in the coming days and weeks.
Tariffs are a problem
Over recent months, in an attempt to “do better deals” and achieve “reciprocity and fairness” in trading relationships with partners around the world, the U.S. under President Trump has introduced a series of protective tariffs and has demanded new trade agreements that level the playing field. The President has said that he prefers bilateral to multilateral trade agreements, and he has backed up his request for a renegotiating of deals with tariffs Canada, Mexico, the European Union, and most importantly China, the leading commodities consuming nation in the world. The initial tariffs caused retaliation from trading partners as well as increasing rhetoric that could lead to a tit-for-tat trade war with many trading partners around the world. The first round of tariffs on China will take effect on July 6, which is likely a deadline for the two sides to come to some agreement. While it is possible that the July 6 deadline could be pushed forward, the current environment has taken a tense turn with China responding with their list of measures aimed at the U.S.
Tariffs distort commodities prices as the raw materials are on the front line when it comes to global trade. We have seen increasing price volatility in many of the commodities that are the subject of protectionist measures. Most recently, the price of soybeans dropped to a decade low last week as China typically purchases one-quarter of the U.S. crop each year. Copper is a bellwether commodity, and its price often reflects the health and economic landscape of the global economy. While the supply and demand fundamentals continue to favor a stable, if not higher, price for the red metal, tariffs and protectionism could be a bearish force if the current environment leads to a trade war that plunges the world into a recessionary period. With copper now around the $3 per pound level once again, increasing tensions on the trade front which lead to recessionary fears are likely to weigh on the price of the red metal which could send the price below its support level and nullify its bullish trading pattern.
Copper volatility is an omen for other asset prices
I have been writing that the tariffs issue threatens the global economic landscape and that a trade war could lead the markets into a period of risk-off where the prices of all assets move lower. If the recent volatility in the copper market leads the red metal to break its pattern of higher lows, it could be a significant event that has far-reaching consequences for commodities prices and markets across all asset classes. While the summer is typically a quiet time in markets, the summer of 2018 could be a highly tense and volatile time in markets as the first round of tariffs take effect on July 6. Copper may probe below the $3 per pound level on the back of tariffs and could challenge its critical support level, and the price of a major copper producing company is now heading for its level of critical support.
The chart of Southern Peru Copper Corporation, a company that is nearly a pure play on the red metal, shows that SCCO has an almost perfect price correlation with copper market since early 2016 when it made a low at $21.55 per share. The last high in SCCO came in late April when the shares reached $58.09, and they have been dropping since that high. On June 22, SCCO was trading at the $46.84 level with critical support nearby at the early February 2018 low at $45.19.
I believe that the trade issues are weighing heavily on the price of copper and could cause the red metal to fall hard if the world continues to move towards a trade war over coming weeks. I will be watching both the copper market and the price of SCCO shares for clues, as copper has a long history in the commodities market as the Doctor that diagnoses the health of the economy. A trade war could lead to a global recession, and copper may be the commodity that is the best indicator over the coming weeks.
The Hecht Commodity Report is one of the most comprehensive commodities reports available today from the #2 ranked author in both commodities and precious metals. My weekly report covers the market movements of 20 different commodities and provides bullish, bearish and neutral calls; directional trading recommendations, and actionable ideas for traders. More than 120 subscribers are deriving real value from the Hecht Commodity Report.
Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.
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