Penny for your thoughts

In the metals futures arena, copper often gets lost in the shine of its more glamorous cousins, gold and silver (and even platinum). Given it’s up more than 20% this year—even after a relatively sharp pullback from its mid-October high—while gold and silver only recently emerged from extended consolidations, that’s a bit ironic, from a trading perspective.

But copper is an industrial metal and gold and silver are (mostly) precious metals, and never the twain shall meet—or should meet, anyway. Gold, especially, is mostly dug out the ground, melted, and then, more or less, put back in the ground (in vaults). Copper is actually used to build things.

You know who builds lots of stuff? China, that’s who. That’s why copper, which had been moving modestly higher since April, shined particularly bright in late July courtesy of news that China was considering a ban on certain scrap metal imports.1 China is the world’s largest copper importer, and has long used scrap to meet its voracious demand. When the biggest copper consumer on the planet announces it will no longer rely on one of its traditional sources, that makes, in theory, for a tighter market.

The chart below shows March 2018 copper futures (HGH8) rallied to a contract high in early September, pulled back to the level of its late-July, early-August consolidation, then rallied to a new high of $3.2790 in October before drifting lower into early December—with a huge (-4.4%) down day on December 5 thrown in for dramatic effect.

March 2018 copper futures (HGH8), 5/4/17 – 12/13/17

Source: OptionsHouse

The thing about the ban, though, was that it was a little vague, both in terms of when it would take effect (sometime in late 2018…or maybe 2019) and what, exactly, would be prohibited. Reports in August that China’s Ministry of Environmental Protection published a list of banned waste imports that excluded copper2 were followed by news in late September that China was already enforcing some copper import restrictions and cutting quotas, although a complete ban on scrap copper imports was still unconfirmed.3

As recently as late October, though, at least one Wall Street player still saw longer-term upside in copper. Goldman Sachs strategists argued that, among other factors, a longstanding copper surplus was likely to turn into a deficit in 2018. The firm accordingly upped its 12-month average price target for copper to $7,050/ton (around $3.52/lb. in futures pricing).4

Which brings us back to the recent technical picture. After six consecutive days of higher highs or closes, March copper futures yesterday topped out close to the former near-term support (now resistance) level defined by the November lows. The intraday chart below shows the market pushing out of the upside of yesterday’s intraday consolidation and hugging the day’s highs.

March 2018 copper futures (HGH8), 12/12/17 – 12/13/17

Source: OptionsHouse

Downside price action today could, potentially, set up a challenge to the early December low or the longer-term support level (around $2.91). But a strong move above yesterday’s high could open up a challenge to the November highs around $3.20.

But keep in mind: Copper rarely goes anywhere without some drama. It’s a volatile market (take another look at the December 5 bar—that’s a nearly $3,400 move per contract), which can be a good thing short-term traders—as long as they’re disciplined, well-capitalized, and wary.


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1 Reuters. China's threatened scrap import ban jolts copper into life. 7/31/17.

2 Reuters. China to exclude some scrap metal from waste import ban. 8/17/17.

3 MetalBulletin.comFOCUS: China cuts copper scrap import licences, quotas. 9/28/17.

4 Goldman says market not 'fully appreciating' what's sending copper higher, as it ups forecast. 10/24/17.