The LME Copper price set a new record of $10,745 this week as tightness in the scrap market shows no sign of easing just yet.
Coppers’ unstoppable run over the last year has taken many by surprise. Like lumber, the Copper price has been a beneficiary of the covid-19 pandemic.
Whilst the virus wreaked havoc on the supply of the red metal. The monetary stimulus that followed created a tsunami of demand like never seen before.
Copper is second only to silver in electrical conductivity and therefore is widely used. Copper can be found in everything, from iPhones to washing machines, and even more so in the future, cars.
The global push to decarbonization has further emboldened the copper price. The agenda to bring forward electrification is likely to provide continued tailwinds for the copper price for some time.
It’s estimated that one electric-powered car contains up to four times the amount of copper as a traditional combustion engine counterpart.
Declining Stockpiles
The recent tightness in the scrap marketc has helped accelerate the decline in global copper stockpiles.
Discussing the supply-side bottleneck, Bank of America analyst Michael Widmore said:
“The copper market is tight; inventories are trending lower. There is a risk that prices of the red metal spike to $13,000,”
The bank also forecast a deficit of 189,000 tonnes in 2021, followed by a worrying 369,000 shortfall next year.
Huge copper position
The writing has been on the wall for some time that the copper price could make a parabolic move higher.
Towards the end of 2020, someone put on a series of large option bets. With the copper price trading around $7,000, the call options at the $8,000 strike price looked a long shot.
It wasn’t.
In February, Reuters revealed that Chinese brokerage Shanghai Dalu had built a huge copper position and held over $1 billion worth of the metal. This was the trigger for the copper price to embark on a blistering rally from $7,800 to $9,600 in a month.
Copper Price Outlook
The price has paused in the last two trading days. This has been typical throughout the last year. A spike higher, followed by a period of consolidation, followed by yet another spike higher.
Whilst I expect that the copper price may come back from here, I don’t see anything suggesting it will lose its long-term uptrend.
The price is currently working off its overbought conditions and the RSI has pulled back to 66 from a reading of 80.
This tells me that the copper price may continue lower in the immediate future.
Until a time that we see LME stockpiles increase, I think dips will continue to be bought. A move towards the February high at $9,600 would offer a great entry point to establish a long position.
However, I would not recommend shorting a market with supply issues as, quite often, the top is marked with a ferocious rally before prices eventually subside.
Don’t miss a beat! Follow us on Telegram and Twitter.
Copper Chart
Follow Elliott on Twitter.