Copper is an important industrial metal that is widely used in industrial machinery, home appliances, electrical equipment, motors, roofing, plumbing and others. The metal is soft, malleable, and pliable. Because copper is an excellent conductor of heat and electricity, it is drawn into wires.
The price of copper is usually less volatile than gold and silver because the former is not considered a store of value and is, therefore, less prone to speculation on part of speculators. Chile is the world’s largest producer of copper, producing around 5.6 million metric tons of copper in 2021, whereas the second-largest producer, Peru, produced around 2.2 million metric tons in the year. China was the largest consumer of copper in 2020.
Global Copper Market
The following regions are famous for their abundant copper reserves:
1- In the western side of the Andes mountain in Peru and Chile (South America)
2- In Great Basin and Los Angeles areas (West United States)
4- Eastern & Central regions (Canada)
5- Zambia and Congo (Africa)
Chile, China, the United States, Zambia, Peru, Mexico, Canada, and Australia hold the majority of copper resources in the world. Together, these countries account for more than 50% of the world’s copper resources, with Chile alone accounting for around 30% of the world’s copper reserves.
Global refined copper production more than doubled in two decades between 1950 and 1970, growing from around 3 million tons in 1950 to around 7.5 million tons in 1974. The total global copper mine production increased to around 21 million metric tons in 2021.
Developed countries consume the majority percentage of the world’s total copper consumption, with the Western Europe area being the world’s top copper consumer. Copper consumption in Asian countries has been growing at a faster rate than that of developed countries after 2000. In 2021, total global copper consumption was estimated to be around 24.4 million metric tons.
Ways to Invest in Copper
Copper supply comes from two sources: underground mining and recycling of copper products:
You can invest in copper either directly or indirectly. Direct investment involves buying physical metal, whereas indirect investment means buying financial instruments that give exposure to the underlying metal, copper.
In this article, we explain in detail how you can invest in copper.
1- Direct Investment
Like gold and silver, you can hold copper in the form of bullion bars. There are plenty of copper bullion manufacturers that offer copper bullion bars and coins with different weights, designs, and prices. Copper bullion is suitable for long-term investment and portfolio diversification purposes. However, you should only deal with licensed and authorized bullion dealers to be sure about the quality and purity of the bullion you purchase. Some antique copper coins could fetch you a higher amount than their intrinsic values.
2- Indirect Investment
Instead of buying copper bullion bars or coins, you can also invest indirectly in copper through financial instruments, such as futures, copper mining stocks, and copper exchange-traded funds. All of these securities give you exposure to the metal without physically owning it.
Copper futures are exchange-traded legal contracts that allow you to buy or sell copper at a predetermined price on a specified future date. The following table details popular copper futures contracts:
|Symbol||Exchange||Contract Unit||Price Quotation||Settlement Method|
|HG||Chicago Mercantile Exchange (CME Globex)||25,000 pounds||U.S. dollars and cents per pound||Deliverable|
|MCC||Multi Commodity Exchange of India (MCX)||25,000 pounds||Indian Rupees and paisas per pound||Deliverable|
|SCF||Shanghai Futures Exchange (SHFE)||5 metric tons/lot||Yuan (RMB)/metric ton||Deliverable|
|CA||London Metal Exchange (LME)||25 tonnes||U.S dollars per tonne||Deliverable|
Copper futures are leveraged contracts that allow traders to open large contracts without having the full value of the contract in their accounts. With futures, you only need to have an amount equivalent to the initial margin, a percentage of the total value of the contract, in your account as cash to open a contract. However, you need to be careful and adopt risk management measures while trading futures as leverage can amplify your gains as well as losses.
Futures contracts are standardized and are traded on organized exchanges. If you buy and hold the contract until its maturity, you are eligible to take the physical delivery of the underlying copper. However, if you don’t want to take physical delivery and just want to profit on the price movements of copper, you need to close your contract before its expiration date.
Although many traders and speculators trade copper futures to profit from the ups and downs in the prices of the metal, corporations that deal in copper use futures contracts to hedge from the price fluctuation in future.
For example, a corporation that frequently buys copper to run its operations can benefit from futures contracts if it believes that copper prices would rise in the future. The corporation could buy a copper futures contract to lock in prices and take the physical delivery of copper, saving itself from a possible rise in the prices of copper. However, if the prices fall instead of rising, the corporation would suffer losses. But future contracts allow corporations to plan their operations in a better way and don’t have to predict what the future prices of copper would be.
Copper mining stocks
You can also get exposure to copper if you invest in stocks of copper mining companies. Copper mining stocks mostly move in tandem with copper prices, making them a decent investment option if you want to invest in copper.
If you are bullish on copper, you need to buy copper, and if you are bearish on copper, you might consider shorting copper mining stocks. The added advantage of investing in copper mining companies is that you can invest in them for the long term as opposed to futures that give you direct exposure to copper but are primarily short-term investments. Also, when you invest in copper or metal mining stocks, you essentially invest in a business that not only gives you exposure to precious metals but also potentially provides you with dividends and capital appreciation.
Copper ETFs usually invest in copper mining stocks, physical commodities, and copper futures in different proportions, depending on the fund’s investment strategy and objectives. If you don’t want to buy and sell futures contracts, options or CFDs by yourself, buying ETFs can be a decent option as these are managed by professional managers on the behalf of investors. ETFs charge management fees for their investment management services.
Before buying an ETF, you should analyze its holdings, past returns, management fees, and other important metrics. Exchange-traded funds can help you diversify your portfolio as they hold different types of securities, such as stocks, futures, options, or physical commodities, depending on the type of fund. If you have a low-risk tolerance and want to invest in copper without taking too much risk, an ETF can be a good investment.
Here are some of the popular ETFs that give you exposure to copper.
1- United States Copper Index Fund (CPER)
2- Global X Copper Miners ETF (COPX)
The United States Copper Index Fund (CPER) generated an annualized average return of around 5% over the past 25 years (between 1997 and 2022), whereas the cumulative return over the 25-year period was 238%.
Copper Options on Futures
Copper options are contracts that give you a right, but not an obligation, to buy or sell the underlying asset, security, or a futures contract at a specified on or before the option expiration date. Corporations dealing with copper often use copper options on futures to hedge the fluctuation in the prices of copper. However, retail investors can also use options to speculate on the price movements to earn profit.
For example, if you predict that the prices of copper would rise in the future from $4 per pound to $8 per pound, one method of profiting from it is to buy copper futures or a CFD contract. However, futures and CFD contracts obligate you to honour the contract on its expiry date. Another method you can adopt to profit from your prediction of higher copper prices in future is to buy a Put option. When you buy a copper Put option, you get the right but not an obligation to sell the underlying copper future contract at a strike price on or before the option expiration date. So, when the prices indeed rise to $8 before the option’s expiry date, you can exercise the option and earn a profit of $4 per pound less the option fee or premium.
Risks and Advantages of Investing In Copper
Investing in copper has its risks and advantages, and it is important that you understand them before investing in them to create your investment strategy accordingly.
Risks of Investing in Copper
- Copper is sensitive to economic conditions. For example, during periods of economic downfall, demand for copper can dwindle and result in a decline in copper prices. On the other hand, during periods of economic prosperity, demand for copper increases and the prices surge. So, before investing in copper, you need to analyze the economic conditions to predict the demand and prices of the metal.
- Investing in copper futures, options and other derivative contracts involve leverage, which can be risky as even small movements in prices can have a significant impact on your profit and loss.
- Investing in physical bullion of copper, such as coins and bars, may entail storage and insurance costs, which can reduce your returns.
- There are limited number of copper ETFs available on the market whereas no copper mutual fund is available on the market.
Advantages of Investing in Copper
- Because copper is a widely-traded commodity, there are plenty of ways to invest in it. For example, you can buy physical copper, copper futures contracts, copper mining stocks, copper ETFs to get exposure to copper.
- Copper is considered a good hedge against inflation and a weak dollar because its price typically increases during expansion.
- Buying copper bullion, stocks of copper mining companies and copper ETFs can provide you with long-term gains and are ideal methods of investing in the metal for the long term.
- Buy stocks of copper mining companies could also provide you with cash dividends if the management decides to make the payout.
Factors that influence the prices of copper
You need to be aware of the factors that influence the prices of copper if you want to invest in the metal profitably. Knowing these points would allow you to trade copper at the right time, keeping in view a combination of variables. Here are the most important factors that move the prices of copper.
1- Forces of Demand and Supply
One of the important principles of microeconomics states that prices of goods or services increase when demand for them exceeds their supply. The reverse also holds true: When the supply of goods or services exceeds their demand, prices usually decline.
To determine the supply of copper, you can find stocks held by the largest commodities exchanges, such as the London Metal Exchange (LME), the Shanghai Futures Exchange (SHFE), the New York Merchantile Exchange (NYMEX). While you can easily track copper stocks held by the exchanges, stocks stored by manufacturers, consumer businesses, and traders are difficult to trace.
It is equally important to observe the demand-side of the equation. You can find copper export and import figures of large economies, determine their GDP growth, economic conditions, and other factors to forecast demand and trend of copper prices.
2- Macroeconomic Situation
Macroeconomic situation in the world’s largest economies can disturb consumption and demand for copper, which, in turn, could influence copper prices. During times of economic growth and rising industrial output, demand for copper usually rises which can increase copper prices. On the other hand, during a recession when industrial output declines, demand for copper dissipates which can result in a decline in copper prices.
3- Copper Consumption
With the advances in technology, the use of copper is expanding to different industries, including medicine, superconductors industry, biology, and other fields. Growth in construction and real estate industries in developed countries can also raise copper prices. Some industries have replaced copper with other metals while some industries have modified their processes to use other metals instead of copper. The wide-ranging applications and large-scale industrial adoption of copper can lift its prices.
4- Export & Import Policies
Export and import policies of the leading copper exporting and importing countries also influence the prices of copper. Nations create tariff, import, and export policies to rationalize domestic demand and supply and curb or promote the export or import of the targeted item or commodity. For example, if China, the largest importer of copper, imposes additional tariffs on copper imports, prices of copper could rise because it would be costlier to export the metal to China.