In a January 24 Barchart article, I reiterated my bullish stance on copper, “Bull markets rarely move in straight lines. The copper bull market experienced a significant correction from March through July 2022, but the nonferrous metal appears to be back on a path to challenge the record high and set new milestones on the upside.”
I highlighted China’s appetite for copper and falling exchange inventories in that piece. However, over the past month copper has not appreciated because the macroeconomic landscape indicated a hawkish central monetary policy pushing interest rates and the U.S. dollar index higher. Copper’s price has continued to consolidate in the face of increasing rates and a rebound in the dollar, a sign of underlying strength.
Meanwhile, Freeport McMoRan (FCX), a leading copper-producing company, remains in a very bullish trend that has taken the stock over ten times higher since the March 2020 pandemic-inspired low.
Copper’s trend has remained bullish since the July 2022 low
Copper’s long-term bullish trend is over two decades old.
The chart highlights that copper did not trade above $1.6475 from the late 1960s through 2005. After reaching a $0.6040 low in November 2001, copper has made higher lows and higher highs. Copper has not traded below $1 since 2003 or under $2 since 2016. The latest record peak was in March 2022, when the red nonferrous metal reached $5.01 per pound on the nearby CMOX futures contract.
Copper corrected to $3.15 per pound in July 2022, but at the $4.0735 level on February 23, copper was at the 2022 trading range midpoint.
The latest inflation data point to higher interest rates
January consumer and producer price index data came in hotter than the market’s expectations, setting the stage for continuing the hawkish central bank monetary policy path. The Fed has not changed its 2% inflation target, and with the economic condition running above 6%, the current Fed Funds rate at a midpoint of 4.625% continues to make real interest rates negative.
The CPI and PPI data set the stage for another 25 or 50 basis point rate hike at the upcoming March FOMC meeting, pushing short-term rates above the 5% level. The rate hikes commenced in March 2022 when the Fed Funds Rate was 0.125%, so the trajectory of rate hikes has been aggressive.
When it comes to copper, rising interest rates increase the cost of carrying inventories. Moreover, copper reflects the health and well-being of the overall economy, and rate hikes causing economic contraction are bearish for the red metal.
Meanwhile, quantitative tightening at a rate of $95 billion monthly reduces the Fed’s swollen balance sheet and keeps upward pressure on interest rates further out along the yield curve.
The chart of the U.S. 30-Year Treasury bond futures shows the bearish trend in bonds and rising interest rates.
The dollar index recovered
Rising interest rates caused the dollar index that measures the U.S. currency against other world reserve currencies to rally to a two-decade high in September 2022, reaching 114.745. The dollar index took off on the upside when it exploded through the March 2020 103.96 high, the critical technical resistance level.
The chart illustrates the decline from the September high. Copper reached its $3.15 per pound low in September when the dollar index was at its high. Since the dollar is the world’s reserve currency, it is the pricing mechanism for most commodities, and copper is no exception. COMEX copper futures price the metal in dollar terms, as do the LME copper forwards that trade in London. A strong dollar tends to weigh on copper as it makes the price rise in other currency terms. The dollar index fell from the 114.745 high to above the 104.50 level, allowing March COMEX copper prices to recover to the $4.0735 per pound level on February 23.
Fundamentals remain strong, but rates and currency factors prevent a rally
Green energy, the end of China’s COVID-19 protocols, increasing copper demand with supplies struggling to keep pace, and the decline in inventories remain bullish for copper prices. However, the environment of rising interest rates and a strong U.S. dollar ran contrary to the bullish trend.
Copper will likely remain stable around the $4 level, but eventually, the supply and demand fundamentals will likely cause the bullish path of least resistance to continue.
The long-term trend remains bullish- FCX on price weakness
Freeport McMoRan (FCX) is one of the world’s leading copper-producing companies.
Source: Statista.com
The chart shows FCX was second only to Codelco, the world’s top copper producer, in 2021.
At $40.07 per share on February 23, FCX had a $59.732 billion market cap. FCX trades an average of over 10.77 million shares daily. The company pays shareholders a $0.30 dividend, translating to a 0.75% yield.
The chart shows the rise from a pandemic-inspired $4.82 low in March 2020 to a $51.99 high in March 2022, as FCX shares moved over ten times higher over the two years. Over the same period, nearby COMEX copper futures moved from $2.0595 to $5.01, as the price rallied 143.3%. Mining companies tend to offer investors a leveraged return compared to the underlying commodity they produce.
Over the coming months and years, a higher copper price will likely lift FCX shares. While copper continues to consolidate as rates increase and the dollar index rallies, FCX could pull back, which could be a golden opportunity to load up on shares of one of the world’s leading copper-producing companies.
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On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.