Popular commodities for traders: Copper

What is copper?

Copper is classified as an industrial metal commodity. It is mined from the ground in various forms such as Sulphide ore. Copper is a component of many different alloys such as Bronze. Copper has a number of medical and industrial uses. Due to its very good conducting properties, copper is used in making electrical wires. It is a component of many reagents used in medical laboratories for a number of biochemical tests. In historical times, it was used to produce coins.

Fundamental Influences

In 2016, copper was produced in the largest quantities in Chile, Peru, China, United States, Australia, DR Congo, Zambia, Canada, Russia and Mexico. China consumes most of the copper produced in the world, accounting for 40% of global copper usage. In 2015, China consumed 9,942,000 metric tonnes of copper, surpassing consumption of copper in Europe, USA and Japan combined.

copper-demand-by-country
Copper consumption by region. Statista.com

Copper prices are therefore subject to several fundamental factors:

a) Chinese GDP and manufacturing data: Over time, China has emerged as the number 1 consumer of copper in the world, accounting for 40% of global copper consumption. A contracting Chinese economy connotes a slowdown in manufacturing and therefore lesser demand for copper, which could signal a fall in prices.
b) Global supply-demand dynamics.
c) Supply disruptions such as strikes by workers of major copper mining companies.
d) Copper is widely used in electrical and plumbing works. Therefore, trends in construction can also be used to predict the price of copper.
Trading decisions are usually based on the direction of shift of any of these fundamental influences.

How is Copper Traded?

The most common financial instruments for trading copper are:
Spot
Futures
Options
Contracts-for-Difference (CFD) assets
Exchange Traded Funds

What are the Most Popular Traded Forms of Copper?

The most popular traded form of copper is high-grade copper, usually marked as HG. The active months for the futures contract is the month which follows the present month. Once the contract expires, the active month now converts to the spot month. For instance, the copper contract currently being traded is represented as follows:

Copper (HG) Active Months
March (H)
May (K)
July (N)
September (U)
December (Z)
As at the time of writing this article (February 2017), the contract marked “H” is considered the active month. Once time crosses into March 2017, then the next active month will be the “K” contract while the March contract converts into the spot month.

Trading Copper: Futures vs CFD

To illustrate the similarities and differences in how copper is traded as a futures asset or as a CFD instrument, we will look at the contract specifications on https://www.lcg.com/uk/, see website for full terms and conditions. Your capital is at risk. Last updated on February 27, 2017.

Spot Copper vs Copper Futures

Copper trading on a spot vs futures basis can be looked at in terms of trading copper based on immediate vs future pricing.

Spot copper trading is:

  • Mainly speculators trying to benefit from the changes in price as they occur in the market.
  • Is the form of copper trading done on a CFD broker’s platform.
  • Positions are closed automatically when the existing contract expires.
  • Does not involve physical exchange of the commodity from trader to dealer.

Copper futures trading is:

  • Done primarily to hedge against adverse price fluctuations that may occur at the delivery time of the product in future.
  • Principally done on the futures exchanges.
  • Involves physical exchange of the commodity.

Both spot and futures copper trading can provide trading opportunities in a variety of situations, such as when there is a cyclical shift in construction and industrial data as well as government-mediated price shifts.

Five Copper-Related Commodities

Similar metal commodity include:
Gold
Silver
Platinum
Palladium
Nickel

Top 3 Copper Futures Trading Exchanges

London Metal Exchange (LME; Europe),
the Shanghai Metal Exchange (SHME; Asia)
New York Mercantile Exchange (COMEX/NYMEX; US).

Summary: Trading Copper

An understanding of the market fundamentals that move Copper prices as well as technical analysis on the charts is essential for those interesting in trading copper. It is always important to note that leverage can work in the trader’s favour and also against the trader. Leverage can magnify profits as well as losses.