Trading in COMEX Copper futures is off to a fast start in 2017. How fast? On February 13, the contract reached its fourteenth open interest record this year. That includes 11 consecutive record days in late January and early February. For a product that launched nearly 30 years ago, it’s easy to see why this is a historic month. Let’s take a look at what is behind the surge.
Copper has been a volatile market for most of the past year. Beginning in January 2016, prices saw a slide following the reports of a soft landing for China’s economy. Copper is a key material used in industrial infrastructure, and China uses about 40 percent of the world’s supply, so any kind of movement in their economic outlook is likely to be reflected in the price of copper around the world. In fact, copper futures volume has grown for nine consecutive quarters since China’s economy entered a period of uncertainty, going from 3.4 million contracts traded in Q4 2014 to 6.4 million in Q4 2016.
In this environment, more commercial firms and investors have seen the need to hedge their exposure to copper prices. What makes the recent surge in interest especially strong – the COMEX copper contract has never seen 11 consecutive record days – is that other factors are joining the China effect to create more volatility and a price resurgence in the contract. The Trump administration’s pledge to focus on a $140 billion infrastructure plan has left many market watchers projecting an increase in overall copper demand.
The other factor to consider is that the United States is a net importer of copper. This means that the new administration’s focus on tax reform, trade and infrastructure investment could also have an impact on prices although it is remain to be seen.
Meanwhile, the China fundamentals shifted heading into Q4 2016, with demand picking up, and reports of lower than expected copper inventories there. Projections showing a stronger China economy in 2017 have also likely weighed on the decisions of investors and commercial participants in copper markets. Furthermore, the new fundamentals in the U.S. have created a belief that a future slowdown in China can be picked up by U.S. demand.
A majority of North American commercial users of copper are representing the COMEX price, even if they are not trading. The copper price in the contract is representative of the price in the U.S. among a wide variety of participants, from construction firms to hedge funds. 2017 volume in copper futures trading is at a record, and as long as global events are pushing more firms to trade and hedge their exposure to fluctuating prices and uncertainties, the contract’s price and volume of trading will be a key barometer to watch, both for metals markets and, potentially, the U.S. economy.
A version of this post first appeared in Barron’s.