Copper prices shot up last November, helped by a stronger oil price and good data coming out of China. More recently, copper has also been rallying on the back of a weaker dollar following contentious statements by US President Donald Trump.

The recent rally in copper has seen the metal move from lows of $4 640 per metric ton last year to around $5 830 currently.

‘This bodes well for countries, like Zambia, that rely on export revenues of copper,’ according to Chris Sturgess, the JSE’s Director of Commodities. ‘The most recent improvements in the copper price will naturally give a huge boost to the Zambian economy, which has also seen a great improvement in its exchange rate to the US dollar, strengthening from 12 down to 10 to the dollar.’

It’s also a great help to copper producers, who really feel the pinch when the metal hits a low, according to Chris Kairinos, base metals and energy trader for RMB.

‘Copper is extremely prone to disruptions. Unlike iron ore producers, where monopolies manage supply globally, the producers of copper are much more dispersed. They can’t absorb a lower copper price for too long as they don’t have the kind of balance sheets that large iron ore producers have.’

Demand is emanating from China but Kairinos says it’s unclear how much is driven by credit and how long it will last. With the Chinese economy going through a bit of a slowdown, Chinese officials have stepped up the amount of credit injected into the market.

While Trump has also spoken out about his plans for a major infrastructure programme in the US, Kairinos argues that it’s important to dig deeper to see what his plans are.

There has also been rising interest in copper for housing in India, although at a much slower pace than China. ‘We may see copper grind higher to the $6 000 mark but off reasons that are a bit wobbly. The foundations are not strong,’ says Kairinos. He expects copper prices may fall to around $4 800 dollars per metric ton by the end of this year.

‘The Zambian kwacha will look very good as long as the short-term rally continues. But it is highly debatable whether that will hold. I’m not convinced that the demand for copper is quite as robust as it may seem.’

With copper being such an excellent conductor for electricity, most production over the past decade has been used in wiring, particularly in housing. While the World Bank has projected that growth in copper production could slow from 2019 onwards, copper wiring for electrical cars could give the industry a considerable boost, should they take off substantially.

The JSE commodity derivative market offers two cash-settled copper derivative contracts that give investors exposure to copper, says Sturgess. One of them is priced in rands per ounce, a standardised contract of 2 500 oz or equivalent of 1 134 tons.

The other is a copper quanto contract that tracks the US dollar value of copper and has a slightly larger multiplier, namely one contract equals 25 000 pounds. ‘For the more sophisticated investor who is familiar with derivatives, these clients could easily gain access to the international copper markets through an existing JSE derivatives broker.’

According to Sturgess, both JSE contracts are cash settled off the global derivatives exchange in the US, namely the CME Group, so pricing is assured to reflect the global sentiment. He adds that the JSE works well with RMB, an approved market maker.

‘RMB actively provides liquidity to the copper contracts,’ he says. ‘So clients can easily enter or exit positions thanks to their role.’

By Kim Cloete
Image: Gallo/Getty Images