Commodities, Copper, Features

Analysis with Regina Meani: We are wired to copper

copper mining

The bronze age came about when copper was the first metal to be worked by mankind. They discovered that it could be hardened with a little tin to form the alloy bronze, hence the beginning of a new age for man.  

One of its traditional uses is to make coins but basically, we are all wired to copper in some way.  

Copper is used in and around our homes in the wiring of electrical equipment and motors. It is a good conductor of both heat and electricity and is used in construction, in industrial machinery and transport.  

Copper sulphate and its other compounds are used in agriculture and as a water purifier. Biologically, an adult human requires around 1.2 milligrams of copper a day.

Because copper has so many useful properties, is easily extracted and used widely throughout the world, it has long been perceived as the bellwether for individual countries and for the wider global economy.

The following chart shows the strong relationship between the copper price and the MSCI World Index.  

The MSCI World Index is a broad global index, representative of 23 developed countries markets including: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and with the most significant weighting for the United States market.

The impact of the copper price on the world is evidenced by the MSCI World Index following copper’s lead for the most part with the exception of a divergence during 2019 when the price for copper trended down while markets stretched higher.  

Singling out the Australian market, it is apparent that our own All Ordinaries Index dancers to the piper except for that 2019 bubble.

The beginning of 2020 saw the world and its economies buckle under the weight of the global COVID-19 pandemic. The price for copper peaked first and then fell into sharp decline with the world a few weeks behind.

The long-term chart for the copper price presents a powerful story as the current positioning and momentum for the price resemble that which occurred in the mid-2004 to mid-2005 period where the price reached its then all-time high area between $US1.40 and $US1.50/lb.  

At that time the price paused and consolidated in an upward motion ahead of surging higher to more than double in price within a year.  

The recent push to $US4.89 in May this year was propelled by a short-term momentum burst, which produced a price divergence at the peak initiating a pullback phase.  

This is not out of line with the 2004-05 experience and suggests that the corrective action may continue over the short to medium term, producing more price volatility.  

If the similarities to the 2004-05 corrective phase continue then the price could pullback in the 20-25 per cent range as it restores its momentum to push higher.  

This would be line with support located in the $US4.00-$US4.20 area and lower and more importantly in the $US3.50-$US3.75 range.  

At the time of writing in early July, a drop to the lower levels was not indicated. While this action develops the price retains the ability to retest resistance around $US4.60 and then at the $US4.90 area.  

Once there is a clear breakaway through the high point the metal would gain the ability to head towards $US5.50-$US6.00 and potentially beyond. The risk for the copper price would be a more severe downturn triggered on a drop below $US3.50.

OZ Minerals (ASX: OZL) is Australia’s third largest copper producer operating globally with headquarters in South Australia. 

The company owns and operates the copper-gold mine at Prominent Hill and the copper mine at Carrapateena, both in South Australia.  

Other projects in the pipeline are the West Musgrove project in Western Australia with the Nebo-Babel nickel-copper and Succoth copper deposits, and the Antas, Pedra Branca and CentroGold projects in Brazil.

The share price for OZ Minerals closely tracks the copper price but usually bottoms ahead of the metal and tops out in tandem.

 

However, the recent low in March 2020 was in unison, possibly as it was a quick and pivotal point for both the stock and the metal.  

Since then both prices have enjoyed a strong uptrend with the copper price gaining 146 per cent, while OZ Minerals gained more than double that with a 365 per cent rise to its peak at $27.15 in May this year.

Following its pivotal turnaround in May 2020 the price for OZ Minerals completed a base in June 2020 to spur the advance to $27.15 in May this year.  

At this point the stock encountered resistance, combined with overbought momentum, producing a three-day minor top signalling a pullback.  

The price has support located in the $19-20 range and more importantly around $17.50. The base completed in June last year suggests that once the corrective phase is completed and the stock regains the ability to push through the barrier zone created by the previous peak in the $30-40 zone then the price would head towards higher objectives at $50 and potentially $75.

With our focus on copper, it would be remiss to overlook the big Australian, BHP. Not only is BHP our biggest producer of copper but it produces a range of commodities that empower the global economy.  

Along with the strong copper price, its share price has benefited from the significant gains in iron ore and oil prices. 

It is interesting to note that in times of divergence in the commodities, BHP is able to benefit from its diversity and follow or anticipate its strongest lead.

For most of the first part of 2021 BHP’s share price (ASX: BHP) has been oscillating around its previous high zone of $50.  

The similarities to the mid-2004 period is strong in line with the copper and oil prices with a stable iron ore price during the period.  So far, the oscillation range has swung within a rising frame which currently lies between $45 and $55. 

This action may develop ahead of a breakaway towards $65 and $85 and possibly higher. The risk would be a drop below the framework extending the oscillations into a corrective phase within its long-term upward path. 

This story also appears in the August issue of Australian Resources & Investment.

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