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How to trade copper: a quick guide
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Copper is called the "king of green metals" because of its usage in multiple applications- from batteries, electrical traction motors, solar PV technologies, wind turbines, and not least the electrical grid required to deal with the electrification of the world. In this guide we provide some examples of how to invest and trade copper, while highlighting some of the key drivers dictating the price.
Here are some of the main influences that can affect the price of copper:
- Supply and demand dynamics: The fundamental principle of supply and demand plays a significant role in determining copper prices. Increased demand for copper, particularly from industries focusing on electrification, transmission, electronics, and EV's can drive prices up. The green transition has become an increasingly important driver behind copper demand growth, occurring at a time where miners are struggling with higher input prices from fuel, construction material and labour, as well as lower ore grades requiring more materials to be dug out of the ground to retrieve the copper. Also, rising regulatory and start-up costs for new projects have led to a prolonged period of mismatch between increasing demand and inelastic supply.
- Weather and natural disasters: Extreme weather events like hurricanes, floods, and earthquakes may significantly disrupt copper mining and transportation infrastructure. This can affect supply negatively and in turn drive up prices.
- Global economic conditions: Copper is widely used in construction and manufacturing, so its price is sensitive to changes in global economic conditions, not least in major economies, such as China and the United States.
- Monetary policy: The policies of the US Federal Reserve significantly influence the price of commodities, including industrial metals such as copper. If interest rates rise, this can cause a price negative period due to destocking, while the opposite may be the case when interest rates fall.
- Investor sentiment and speculation: Like other commodities, copper prices can be influenced by investor sentiment and speculative trading in commodity markets. Factors such as geopolitical tensions, trade disputes, and macroeconomic policy decisions can affect investor perceptions and lead to price fluctuations.
- Green transformation: The global transition towards renewable energy sources and sustainable technologies is driving a significant increase in demand for so-called green metals, not least copper, often called the “king of green metals” given its use in multiple clean energy technologies. In addition, increased demand for power, increasingly also from the focus on AI will lift transmission, and with that, demand for copper towards expanding the grid.
So how can you actually trade this popular industrial metal? Here are a few ways:
- Exchange-traded Funds (ETFs) or Commodities (ETCs): One way to gain exposure to copper is with copper ETFs (or ETCs). Copper ETFs are investment funds that either track the price of copper, mostly through an underlying investment in copper futures contracts, or a basket of major mining companies. Investing in ETFs provides exposure to the price movements of copper or copper miners without the need to directly trade futures contracts or own individual mining stocks. Just like equities, copper ETFs are traded on major stock exchanges, making them easily available.
- Copper miners: Another, more indirect, way to gain exposure to copper prices is to invest in copper miners. It is worth noting that no pure copper miner exists; they always mine something else such as gold, silver, or other industrial metals. Investing in mining companies or ETFs that hold a basket of mining stocks provides exposure to copper prices. However, these investments carry operational risks and may exhibit higher volatility compared to copper itself.
- Copper futures and CFDs (options available, but not that liquid): A third way to invest in copper is through futures or CFDs, which are the most direct and most complex ways to trade them. Trading copper futures or contracts for difference (CFDs) involves higher risk due to leverage. While these products offer opportunities for speculation, they also require careful risk management to mitigate potential losses. One High Grade copper futures contract has a contract size of 25,000 lbs, and based on a price at say USD 4.2 per pound, the contract’s value is USD 105,000. As it is a leveraged product, the buyer or seller of such a futures contract has to provide less than USD 4,500 as collateral, leaving the owner of the position highly exposed to losses without proper risk management. CFDs track the futures price with the main difference being the ability to trade smaller quantities than the 25,000-pound futures contract.
The reddish-orange metal is indeed a favourite industrial metal, not least because of the previously mentioned green transition. Now that you understand the factors that influence the price of copper, and the ways to trade copper, you need to figure out if it’s a commodity that is right for you. The only way to do that is to consider your tolerance for risk, and time horizon, as well as your personal financial goals. Before making any investment, always be sure to keep yourself well informed with the latest market news and insights.
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