Copper - A New Kind Of Red Bull

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Summary

A bear market started in 2011.

An ugly 2016 until November.

LME stocks nose dive and infrastructure projects promise demand.

Copper never made a long-term low.

Low production cost- A beautiful thing for producers.

In the wake of the Presidential election in the United States on November 8, the price of copper took off to the upside. Copper broke out of a long-term pattern of lower highs and lower lows. Copper suffered from huge global inventories and a price that remained above production costs for the metal.

Copper broke out of its bearish trading pattern on Election Day. During the campaign, both candidates pledged to rebuild infrastructure in the United States. However, the winner of the contest, President-elect Donald J. Trump has tremendous experience as a builder. The billionaire real estate developer has promised to rebuild roads, bridges and airports in the U.S. and he pledged to build a security wall along the southern border of the nation.

Infrastructure building requires building blocks, the raw materials necessary to get the job done. Metals and minerals prices had been moving higher over the course of 2016 before the election. However, copper was lagging the other commodities when it came to the price of the red metal. The bear market in copper remained in place until Election Day.

A bear market started in 2011

Copper traded at an all-time high in February 2011 when the red metal hit $4.6495 per pound. The bear market in copper began at those highs and until January 2016 copper did nothing but make lower highs and lower lows. Click to enlargeSource: CQG

As the monthly chart highlights, copper finally found a bottom in January 2016 at $1.9355 per pound. Since then it had been in a sideways consolidation pattern with the bulk of trading between $2 and $2.30 per pound. Click to enlarge Source: CQG

The weekly chart of COMEX copper futures shows that while copper stopped making lower lows from January through October, it continued to make lower highs while the lows progressively became higher during the consolidation period. The change in the trading pattern was a sign that the bear market in the industrial metal was coming to an end.

An ugly 2016 until November

Copper struggled throughout 2016, while all other base metals staged impressive recoveries and posted double-digit gains, copper barely was able to show a positive result for the year. Technical resistance on the March futures contract was at just under the $2.32 per pound level. Click to enlargeSource: CQG

Finally, on the day before Election Day in the U.S. copper ventured above $2.32 and in the days that followed the price of the red metal exploded higher reaching $2.7530 per pound, the highest level since June 2015. Copper broke out to the upside for two fundamental reasons, inventories and the potential for fiscal stimulus.

LME stocks nose dive and infrastructure projects promise demand

In October there were over 350,000 metric tons of copper in London Metal Exchange warehouses. As of November 28, that number stood at 234,250 a decline of 33%. Click to enlargeThe chart highlights the drop in LME stocks over the past 30 days. Meanwhile, stocks on the COMEX copper contract went the other way. Click to enlargeAs the chart shows, COMEX inventories grew from 71,860 tons to 76,815 over the thirty day period, an increase of 6.9%. However, between the two markets total stockpiles fell by a whopping 87,195 metric tons over the past thirty days.

It is likely that President-elect Trump's victory caused the increase in stocks in the U.S. The promise of infrastructure building will increase the demand for raw materials and copper is no exception. As the chart of COMEX inventories illustrates, almost all of the increase occurred after Election Day given the promises of the incoming President. Infrastructure building is fiscal stimulus and Doctor Copper is telling markets that the intended policy of a new President is a shot in the arm for the U.S. economy.

Copper never made a long-term low

During the bear market in commodities, many raw material prices made new long-term lows during in 2015 and early 2016. However, copper never approached the December 2008 lows of $1.2475 per pound as it found a bottom almost 70 cents below the January 2016 bottom. At the same time many other industrial commodities traded to the lowest prices in many years and most surpassed their 2008 lows. Copper may not have gone up with the other metal and mineral prices over recent months, but it certainly did not go down to the extent they did in 2015 and February 2016. As an example, crude oil dropped to $26.05 per barrel on February 11, the lowest price since 2003.

One of the signs of just how ugly industrial raw material markets were was that the demand for shipping around the world dried up to almost nothing. Click to enlargeAs the long-term chart of the Baltic Dry Index illustrates, the BDI fell to 290 on February 11, the lowest level in history. Since then, the price has increased more than fourfold to 1202 on November 30, which is down slightly from the highs of the year at 1257 on November 18.

While copper did not follow other raw material prices higher until a few weeks ago, it did not have the same blow off low seen in other industrial commodity markets.

Low production cost- A beautiful thing for producers

Copper production has remained a profitable enterprise throughout the bear market that lasted from 2011-2016. When the price of oil dropped from $107 in June 2014 to $26.05 in February 2016, the cost of producing a pound of copper declined. In June of 2014 the price of copper was comfortably above $3 per pound however, energy is a significant component of production cost and copper producers were able to sell output at a profit due in part to cheaper energy.

Now that copper is higher, copper producers are in even better shape than they were back in 2014 when the price was above $3 per pound. Oil is struggling to get back to half the price it was two and one-half years ago.

At $2.64 per pound, copper is 36.4% higher than the January lows. Meanwhile, shares in two of the world's largest copper producers have outperformed the rally in the red metal. Click to enlargeSource: Barchart

As the chart of Southern Peru Copper Corporation (NYSE:SCCO) highlights, the stock has increased from $21.55 in January to $32.71 as of November 30. SCCO has moved 51.8% higher. Click to enlarge Source: Barchart

Freeport-McMoRan (NYSE:FCX) has done even better, rallying from $3.52 per share on January 20 to $15.47 on November 30, an increase of almost 340%.

Copper has finally broken out of its bearish trading pattern in the wake of the Presidential election. Stockpiles began to fall before November 8 but the prospects for a resurgence of infrastructure building have improved the demand side of the fundamental equation for the metal. Now, if the Chinese economy begins to show signs of increasing growth, copper could take off to the upside. The next level of resistance for the red metal is at the May 2015 highs of $2.9610 per pound with technical support at $2.45. Expect a wide trading range in copper over the weeks ahead. Volatility is back in copper and so long as the price remains at the $2.30 level or higher, copper is once again a red bull.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.