Hedging Against Rising Copper Prices using Copper Futures

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Copper Futures Trading in India

Copper futures

Copper is not a metal that attracts much attention compared to other metals like steel and aluminium. But there are considerable quantities of it in every home and workplace. Because of its excellent conductivity and other properties, copper wires and pipes are used extensively in homes, offices and factories. Copper ranks third in world metal consumption, after steel and aluminium. Apart from electrical cables, copper is used in motor windings, in tubes for air conditioners, refrigerators and heat exchangers. Copper is also emerging as a popular trading commodity . This is usually done through copper futures contracts .

Copper production and supply

The biggest producers of copper are Chile, Peru, China, Democratic Republic of Congo, the USA and Australia. In 2020, Chile accounted for 5.8 million tonnes of the total world production of 21 million tonnes. India produces a modest amount of metal, accounting for around 2 percent of world production. It is mined in the states of Rajasthan, Jharkhand, Madhya Pradesh and Sikkim.

Copper demand and prices

High demand for this metal also drives copper futures investing. In 2020, the need for copper stood at 23.6 million tonnes, which is expected to grow to 30 million tonnes in 2027. The largest consumer of copper worldwide is China, which accounts for almost half of world copper consumption. The US, Japan and India are the other major importers.

Copper demand and prices are affected by a variety of factors. These include supply, economic growth and political developments. Recently, a worker’s strike in Chilean mines led to lower supply and increased prices. Higher economic growth leads to increased demand for copper and hence higher rates. A slowdown, on the other hand, will lead to lower demand.

Demand for copper is expected to get a boost from the growing use of renewable energy like wind and solar power, which need much more copper than conventional energy.

Copper futures

Since copper demand will be high in the future, copper futures investing seems to be a profitable venture. Trading in these futures is done on Indian commodity exchanges like the Multi-Commodity Exchange (MCX).

The most significant advantage of trading copper futures is the leverage. Margins in these futures are quite low and enable investors to take significant positions in the metal. The astronomical positions mean more opportunities to turn in a profit. There is, of course, the risk of large positions; if prices move in an unfavourable direction, the losses can be considerable.

Copper futures enable end users to hedge against price volatility. Speculators too can take advantage of price movements and turn in profits. They are also an option for investors who want to diversify their portfolio.

Futures contracts are available in lots of 1 metric tonne and 250 kg for investors on the MCX. Standard contracts are for February, April, June, August and November.

Pros and cons

Copper futures investing can be profitable for investors since demand will always continue to rise. However, like in all commodity markets , copper prices are volatile. Investors must consider domestic and international factors that could affect demand and cost. If you can keep abreast of the latest developments in the industry and keep a cool head on your shoulders, these can be very rewarding.

FUTURES/OPTIONS; COPPER PRICES CLIMB AS SPECULATORS RETURN

By H. J. Maidenberg

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    March 14, 1984

Prices of copper futures rose yesterday to their highest levels since early December amid the continuing strength of demand for the metal. This prompted most domestic copper producers to add a cent or two a pound to their prices yesterday.

By the close of trading on the Commodity Exchange in New York, the expiring contract for March copper delivery had risen 1.25 cents a pound, to 68.15 cents. Only two months ago this delivery was at its life-of-contract low of 61.5 cents. The active May contract rose 1.15 cents yesterday, to 69 cents.

”After long-overdue buying by manufacturers, which has cut copper stocks registered with the Comex and London Metal Exchange in recent weeks, we now see the long-absent speculative element entering the market,” said Harold Sacks, head of a prominent metals brokerage house bearing his name.

Basic Bullish Factors Cited

”Both buying groups are responding to the same bullish fundamental factors,” he said. ”Also, some of the recent improvement in precious metals prices has spilled over into the copper market.”

The fundamental factors include aluminum’s vanishing premium over copper, which was as high as 12 cents a pound a few weeks ago, Mr. Sacks said. Another is that Japan has sharply increased imports of refined copper from Chile and Peru after reducing its smelting of ore concentrates. He added, ”Normally, much of South America’s copper goes to Europe, and now the users there have joined the line of buyers.”

Ronald M. Hirsch, manager of the Shearson/American Express metals department, observed: ”European demand has reduced the registered copper stocks on the London Metal Exchange to 390,435 tons, as of last Friday, from a recent high of 480,575 tons on Jan. 16. Comex stocks are down to 408,416 tons from its recent high of 417,713 on Feb. 6. Both figures are most bullish, and so is the fact that the speculators are back.”

Distortion in Supplies Noted

When copper buyers are scarce, producers and merchants often register their metal with an exchange in order to sell futures short against their stocks as a means of hedging and offsetting the carrying cost of their stocks.

Another factor driving up copper prices, Mr. Hirsch noted, is the distortion in quality and location of domestic copper supplies. ”There is plenty of metal around, but most of it is either not the grades the users need or in the place where they want it – a situation that usually develops after a long economic recession,” he said.

Because half the copper used in this country comes from scrap, which is mostly provided by factories, the recession also reduced that important source of supply, Mr. Hirsch said.

Si Waksberg, vice president-commodities at the National Association of Recycling Industries, commented: ”Copper scrap will materialize when the price is deemed right by the owners. Currently they do not think the price is right, and so do many users who are starting to pay somewhat more than the posted price of 52 1/2 cents a pound for No. 2 copper scrap.”

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Copper Futures

Copper is unique among other metals because it can establish the state of economic growth in a given country. For example, if the demand for copper is increasing, then the economy is expanding. In fact, the World Bureau of Metal Statistics has cited an 8% increase in copper consumption during 2020 alone—most notably in Asia—and since then, the demand has continued to climb. Because copper is so vital for construction and electric wiring, it is no wonder this precious metal maintains its significance alongside silver and gold in futures investing. Copper futures can be used as a hedging tool for price mitigation. Copper futures also offer advantages like central clearing and transparency of price among traders.

Copper Contract Specifications
Product Symbol HG
Venue CME Globex, CME ClearPort, Open Outcry (New York)
Trading Hours CME Globex: Sun–Fri 5:00pm–4:15pm CT with a 45-minute break each day beginning at 4:15pm
CME ClearPort: Sun–Fri 5:00pm–4:15pm CT with a 45-minute break each day beginning at 4:15pm
Open Outcry: Mon–Fri 7:10am-12:00pm CT
Contract Size 25,000 pounds
Price Quotation U.S. Cents per pound
Please note: Prices are disseminated in U.S. Dollars and Cents
Minimum Fluctuation $0.0005 per pound
Termination of Trading Trading terminates on the third last business day of the delivery month.
Listed Contracts Trading is conducted for delivery during the current calendar month, the next 23 calendar months, and any March, May, July, September, and December falling within a 60-month period beginning with the current month.
Settlement Type Physical
Settlement Procedure Daily Copper Futures Settlement Procedure
Final Copper Futures Settlement Procedure
Delivery Period Delivery may take place on any business day beginning on the first business day of the delivery month or any subsequent business day of the delivery month, but not later than the last business day of the current delivery month.
Trading at Settlement (TAS) Trading at Settlement is allowed in the active contract month. The active contract months will be March, May, July, September and December. On any given date, TAS transactions will be allowed only in a single contract month. TAS transactions may be executed at the current day’s settlement price or at any valid price increment ten ticks higher or lower than the settlement price.
Grade and Quality Specifications The contract (basis) grade for the Grade 1 copper contract shall be Grade 1 Electrolytic Copper Cathodes (full plate or cut) and shall conform to the specifications (as to chemical and physical requirements) for Grade 1 Electrolytic Copper Cathode as adopted by the American Society for Testing and Materials (B115-00), or its latest revision.
Exchange Rules These contracts are listed with, and subject to, the rules and regulations of COMEX.
Source: CME

Copper Facts

Copper is one of the world’s oldest and most mined commodities, just behind aluminum and iron. Humans have been using copper for more than 10,000 years and its origins can be traced back to Cyprus, Greece and Egypt. Copper is the most popular metal to be used for industrial purposes. It is the best conductor of electricity and is resistant to corrosion. Copper is known to be biostatic, which means that bacteria cannot grow on it. Therefore, copper is used in items like door handles and food surfaces for hygienic purposes. Global copper production has been on the rise since 2020 and the top producer is Chile, followed by Peru and China. China is the top consumer of copper.

Last updated May 2020

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