From the May 2014 issue of Futures Magazine • Subscribe!

Metals: A fundamental story

Copper (COMEX:HGM14)

Most of copper’s recent action has been from the supply side. In the last decade copper has been very profitable for mining companies around the world.

Demand has been driven by industrialization in China and the incredible growth in its manufacturing industry, and automobile sales in China and the rest of the emerging world, according to Mohr. (Automobile manufacturing uses a lot of copper for wiring.)

Mohr says copper has performed well because for the five years leading up to 2012 there was very little new supply, but in the past 18 months there has been a wave of new mine supplies causing copper prices to fade.

In regards to supply for copper, the major refining nations include the United States, Japan, Chile and the European Union. Chile, Indonesia, Canada and Australia are the major exporters, while Japan, China, the European Union and Philippines are the major importers. World copper mine production through exploration of new mines and expansion of existing mines also is a major factor that effects copper supply and pricing.

Supply disruptions should also be taken into consideration for those interested in copper trading. Strike periods that occur with expiration of labor contracts have a significant effect on copper prices. Additionally, earthquakes and shipping problems, as well as political unrest in Chile, Peru and South Africa, can cause a decrease in supplies of copper and cause copper futures to rally.

The main report for copper futures is the Copper - High Grade Warehouse Stocks. This report indicates whether copper supplies are increasing or decreasing.

Perhaps there is no better measure of global economic health than the price of copper because it is used to build things. Big things like houses and cars. While the Federal Reserve and other central banks can prop up equity markets, creating the illusion of financial health through QE as well as manipulate currencies markets to its liking, you can’t build a house or a car without copper; and if demand rises that will be seen in the price. 

Platinum (NYMEX:PLN14)

Like gold and silver, platinum is traded around the clock on global commodities markets. It tends to fetch a higher price than gold during routine periods of market and political stability, simply because it’s much rarer—far less of the metal is actually pulled from the ground annually. 

Like silver, platinum is considered an industrial metal. The greatest demand for platinum comes from automotive catalytic converters, which are used to reduce the harmfulness of emissions. Jewelry also accounts for a great deal of demand. 

Petroleum and chemical refining catalysts and the computer industry also factor into demand.

Because of the auto industry’s heavy reliance on the metal, platinum prices are determined in large part by auto sales and production numbers. “Clean air” legislation could require automakers to install more catalytic converters, increasing demand, but in 2009, American and Japanese car makers were turning to recycling, or using more of platinum’s reliable (and usually less expensive) sister metal, palladium.

With aluminum, prices have been exceptionally weak for some years, but it’s not due to lower demand—there is demand from many countries. Aluminum is used in automobile production and in electronic transmission systems, boosting the demand from the automobile manufacturing side. 

But decreasing demand stems from China building its own aluminum smelting industry. China, a big importer of copper, has become self-sufficient and doesn’t need to import large quantities anymore. This has caused aluminum to be in over-supply for a number of years.

The metals markets are interesting and can offer a lot of trading opportunities if you can keep an eye on the fundamental drivers and related news.

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