What is copper?
Copper is a versatile and widely used metal with excellent electrical and thermal conductivity. It is commonly found in electrical wiring, plumbing systems, and various industrial applications. As an industrial metal, copper plays a crucial role in global infrastructure development and economic growth. Its importance and wide-ranging use ensure demand for copper is high, which helps make it one of the world’s most widely used and traded commodities.
Where does copper come from?
Copper is primarily obtained through mining and extraction. The major sources of copper are:
- Copper mines: Copper is extracted from large-scale open-pit or underground mines. These mines are located in various regions around the world, including Chile, Peru, the United States, Australia, Indonesia, Russia, and Zambia. These countries have significant copper reserves and contribute to the global copper supply.
- Porphyry copper deposits: One of the most common sources of copper is porphyry copper deposits. These deposits are formed through geological processes involving magma intrusions. Large-scale mining operations extract copper from these deposits, which often have significant amounts of associated minerals, such as gold, molybdenum, and silver.
- Secondary sources: Copper can also be obtained from secondary sources, including recycled copper from scrap materials, electrical cables, and electronic waste. Recycling copper helps conserve resources and reduce the environmental impact of mining.
Why is copper valuable?
Copper is valuable for several reasons, including:
- Industrial demand: Copper is an essential metal in various industries, including construction, electrical and electronics, transportation, and telecommunications. Its excellent electrical and thermal conductivity, corrosion resistance, and malleability make it indispensable in many manufacturing processes.
- Infrastructure development: As countries invest in infrastructure projects such as building roads, bridges, power grids, and telecommunications networks, the demand for copper increases. Copper is extensively used in these projects for wiring, plumbing, electrical systems, and other essential infrastructure components.
- Global economic growth: Copper demand is closely tied to economic growth. As economies expand, the demand for copper rises due to increased industrial activity, urbanisation, and technological advancements.
- Renewable energy transition: The shift towards renewable energy sources like solar and wind power requires significant copper usage. Copper is a key component in solar panels, wind turbines, and the associated electrical infrastructure needed to transmit and distribute clean energy.
- Limited supply: While copper is abundant in the Earth's crust, the availability of high-quality copper deposits is finite. The extraction and production of copper can be costly and time-consuming. This limited supply contributes to its value.
- Investment and speculation: Copper attracts investors and speculators who anticipate future price movements and seek to profit from them. The commodity markets provide opportunities for individuals and institutions to trade copper contracts and derivatives, driving demand and influencing prices.
- Inflation hedge: Copper is often viewed as a hedge against inflation. During periods of rising inflation, commodities like copper are perceived as stores of value and can help protect against the erosion of purchasing power.
What is the copper market?
The copper market refers to the global network of buyers and sellers involved in the production, consumption, and trading of copper. It is influenced by factors such as supply and demand dynamics, geopolitical events, economic indicators, and investor sentiment.
What factors influence the price of copper?
The price of copper is affected by a wide range of factors, but some of the more important ones are as follows:
- Supply disruptions: Copper supply disruptions can occur due to various factors, such as labour strikes, natural disasters, political instability, or technical issues that affect mining operations. When the supply of copper is reduced, it can create a supply deficit, leading to higher prices as demand outpaces available inventory.
- Oil prices: Oil prices can indirectly influence the price of copper. Higher oil prices can increase production costs for mining companies, as energy-intensive processes are involved in copper extraction and processing. When oil prices rise, mining and transportation costs increase, which can put upward pressure on copper prices.
- Metal substitution: The availability and cost of alternative metals can impact the demand for copper. If the price of copper becomes high compared to other metals with equivalent properties, manufacturers may choose to substitute copper with alternative materials in their products. This substitution can reduce the demand for copper, leading to lower prices.
- US dollar: The US dollar's strength or weakness can influence copper prices. Copper is globally traded, and its price is often denominated in US dollars. When the US dollar strengthens against other currencies, it can make copper relatively more expensive for buyers using other currencies. This can potentially reduce demand and put downward pressure on copper prices. Conversely, a weaker US dollar can make copper more affordable for buyers using other currencies, increasing demand, and potentially driving prices higher.
- Economic growth: Copper prices are closely tied to global economic growth. As economies expand, there is increased demand for copper due to infrastructure development, construction projects, industrial production, and technological advancements. Strong economic growth can drive up copper prices as demand outpaces supply. Conversely, economic slowdowns or recessions can reduce demand for copper, leading to lower prices.
What is copper trading?
Copper trading involves buying and selling copper contracts or derivatives in financial markets. Traders aim to profit from price fluctuations in copper by speculating on its future value. Copper trading can be conducted through various platforms, including futures exchanges, commodities brokers, and online trading platforms.
How does copper trading work?
To invest in copper, you can either buy it as a physical raw material or simply trade the real-time price movements of the underlying asset. Here are the common ways to trade copper:
- Physical copper: This is when you purchase a physical quantity of copper, which you store as an asset until you are ready to sell.
- Copper futures: If you believe the price of copper will go up in the future, you can enter a contract where you agree on a price to pay today for a quantity of copper that will be delivered at a set date in the future. The aim is to then sell the physical copper for more than what you paid.
- Copper CFDs (Contracts for Difference): CFD trading lets you trade real-time price movements without having to buy any physical copper. Because CFDs are leveraged products, you only need to invest a small sum to gain full exposure to the underlying trade. Note that the profit or loss is calculated according to the full size of the trade position, so both profits and losses are magnified.
To demonstrate how a copper trade works, let’s consider an example:
You read news about a large new infrastructure project that will require a lot of copper during the construction phase. You, therefore, believe that demand for copper will increase, and the price will rise.
You decide to enter a long position by buying one copper futures contract at the current market price of $4 per pound (note: each copper futures contract represents 25,000 pounds of copper).
The price of copper then rises to $4.20 per pound, at which point you decide to close your trade position.
The price difference is $0.20 per pound, resulting in a profit of $5,000:
25,000 pounds x $0.20 = $5,000 profit
However, if your prediction was incorrect and the price of copper decreases from $4 to $3.90, you end up incurring a loss:
25,000 pounds x $0.10 = $2,500 loss
As you can see, copper trading involves a degree of risk because prices can move in either direction. It is crucial to conduct thorough research, use risk management strategies, and consider market trends before making trading decisions. And you should never trade more than you can afford to lose.
Why trade copper?
There are several reasons why traders choose to trade copper. These include:
- Volatility: Copper prices can experience significant volatility, creating opportunities for traders to speculate on price movements.
- Diversification: Copper can serve as a diversification tool in an investment portfolio, as it often has a low correlation with other assets like stocks or bonds.
- Global demand: Copper is in high demand due to its industrial uses, particularly in emerging economies with increasing infrastructure development, so it is a popular trading commodity.
- Economic indicators: Copper prices are sometimes viewed as a leading economic indicator, as they can reflect changes in global economic activity.
How to trade copper?
To start trading copper, follow the general guidelines below:
- Learn and prepare: Take time to learn more about copper, market trends, and trading strategies. Reading, attending trading webinars, and taking online courses are all simple and cost-effective ways to enhance your knowledge of copper and trading.
- Choose a broker: Select a reputable and regulated broker that offers copper trading instruments, such as copper futures contracts or copper CFDs, through their trading platform.
- Open a trading account: Complete the registration process, verify your account, and fund the trading account to have money available for trading.
- Develop a trading plan: Define your trading goals, risk tolerance, and strategies. Consider factors like technical analysis, fundamental analysis, and risk management.
- Practise with a demo account: Most trading platforms offer demo accounts where you can practise trading using virtual funds. Take advantage of this feature to gain experience in the copper market and test your trading strategies without risking any real money.
- Start trading: Once you feel confident in your ability, start trading copper using real funds. Be sure to monitor market trends closely, set entry and exit points, use stop-loss and take-profit levels, and regularly evaluate your trades.
Advantages of trading copper
Trading copper offers several advantages, including:
- Liquidity: The copper market is highly liquid, allowing traders to enter and exit positions with ease.
- Global demand: Copper has widespread industrial applications and is in high demand globally, making it an attractive commodity to trade.
- Volatility: Copper prices can experience significant volatility, providing opportunities for traders to profit from price movements. Volatility, however, could also lead to significant losses.
- Diversification: Copper can serve as a diversification tool in an investment portfolio, as it often exhibits a low correlation with other assets like stocks or bonds.
- Leverage: Copper can be traded with the use of leverage, enabling traders to control larger positions with smaller capital investment.
- Flexibility: Copper trading allows traders to take both long and short positions, potentially profiting or losing from both rising and falling prices.
- Economic indicator: Copper prices are sometimes considered a leading economic indicator, as they can reflect changes in global economic activity.
- Industrial growth: As economies grow and industrial sectors expand, the demand for copper typically increases. Thus, it could present trading opportunities for those who can anticipate and respond to these trends.
Disadvantages of trading copper
While copper trading has its advantages, it also has some disadvantages to consider:
- Price volatility: Copper prices can be highly volatile due to factors including geopolitical events, economic data, and supply-demand dynamics. This can result in significant price swings that can result in losses.
- Trading costs: When trading copper, traders may incur costs such as commissions, spreads, and overnight financing charges, which can impact overall profitability.
- Knowledge and experience: Successful copper trading requires a good understanding of the market, technical analysis, and risk management. Lack of knowledge and experience can increase the risk of losses.
- Limited trading hours: Copper futures or contracts have specific trading hours, which may limit the opportunities for traders to react to market events that occur outside of those hours.
- Supply chain disruptions: Disruptions in copper mining, production, or transportation can affect the availability and pricing of copper, adding unwanted uncertainty for copper traders.
What are the most popular copper trading strategies?
There are many different approaches to trading copper, but here are some of the most used copper trading strategies:
- Trend following: This strategy involves identifying and following trends in copper prices. Traders look for sustained upward or downward movements and enter positions in the direction of the trend. They may use technical indicators, such as moving averages or trendlines, to confirm and time their entries and exits.
- Breakout trading: Traders using this strategy focus on price breakouts from key levels of support or resistance. When copper prices break above a resistance level, indicating upward momentum, traders may enter long positions. Conversely, when prices break below a support level, indicating downward momentum, traders may enter short positions.
- Range trading: This strategy involves identifying price ranges or consolidation patterns in copper price charts. Traders aim to buy near the support level and sell near the resistance level within the range. They may use oscillators or other indicators to try to identify overbought or oversold conditions within the range.
- News trading: Traders following this strategy closely monitor news and economic releases that may impact copper prices. They typically aim to capitalise on short-term price movements resulting from significant news events or economic data. This strategy requires quick reaction times and a good understanding of market reactions to news events.
- Seasonal trading: Seasonal patterns can impact copper prices. Traders using this strategy analyse historical price data to identify recurring patterns or trends during specific times of the year. For example, increased demand for copper during the construction season may result in higher prices. Traders can position themselves accordingly based on these seasonal trends.
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This information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. It has been prepared without taking your objectives, financial situation, or needs into account. Any references to past performance and forecasts are not reliable indicators of future results. Axi makes no representation and assumes no liability regarding the accuracy and completeness of the content in this publication. Readers should seek their own advice.