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What’s all the fuss about copper futures?


Copper is on a roll it seems, with more futures traders than ever taking a position in the market. CME Group has said that the open interest for copper futures contracts exceeded 300,000 for the first time on 13 February. Copper ended that trading session with a total of 300,996 contracts open interest, beating the previous record set on 1 February.

Since the beginning of the year, copper futures have blown through the open interest record for the commodity 14 times, including 11 consecutive record-setting days.

“Copper and industrial metals have continued to experience heightened levels of volatility and uncertainty,” explains Young-Jin Chang, group global head of metals with CME Group.

Chang said market participants were using the exchange’s COMEX futures to hedge price risk, as shown by both the volume growth and the new open interest records.

The Armchair Trader says: Copper has been having an interesting year so far. Two of the biggest mines in the world, the BHP Billiton mine at Escondida in Chile and the Freeport McMoRan mine in Indonesia, have both been plagued with problems. It doesn’t take much, but with rumours of Chinese demand for copper picking up again, it is no surprise we are seeing higher levels of volatility coupled with rising prices.

Citi Research has helped to fan the flames under copper, by claiming that the market will shift from over-supply to under-supply for the first time in six years, and has gone further, saying that it thinks the red metal will remain in deficit as the global economy picks up. Citi added that there was a lack of visible copper inventory build – i.e. it is hard to see anyone storing the stuff.

Copper has the benefit of not being perishable, hence some market participants may be sitting on the stuff in anticipation of higher demand, but even this is unlikely to make much of an impact on the price if Chinese demand picks up.

However, be cautious – the market likes to overplay the China demand story: China drove base metals prices for a long time, but we do not expect Chinese demand to exceed earlier levels. A return to global growth, on the other hand, would drive up copper prices, and other commodities, and this is what many traders are hoping for.

At the time of writing, spot copper was trading in the 2.7265 – 2.7263 range.

What is open interest?

Open interest is the term used for the total number of unsettled derivative contracts. A contract is considered open for as long as it is active. Once it is settled, it will no longer be considered open interest. Unlike with share trading, there is not a finite number of contracts to be traded on a derivatives exchange. Open interest therefore offers traders a good idea of both the liquidity and the market enthusiasm for a contract. It won’t provide a view of the size of the long or short market, so you won’t know whether traders are net bears or feeling bullish. But it is a good measure of activity.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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