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Copper prices are rallying on Thursday, on reports that China is contemplating a $220 billion stimulus package, according to Bloomberg. However, Shanghai, a key industrial hub, will conduct a new round of COVID tests this week, stoking fears that renewed lockdowns could occur. These fears could weigh on copper prices and expectations of demand recovery. On Wednesday, Fan Rui, an analyst with Guoyuan Futures Co. told Bloomberg “There is no bullish news at the moment, really… in China, the economy is facing a double blow from the flare-up of new cases and a weaker-than-expected demand recovery.” Geordie Wilkes, head of research at Sucden Financial Ltd, echoed similar comments, stating “We’re certainly expecting more downside…. We’re not in a recession yet but we’re certainly seeing slower growth, and so there aren’t any real prospects for copper to rally meaningfully from here.” |
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Copper’s price plunge continues in 3Q, as the LME 3M Select last traded at $7,876.50/mt (7:00 AM CST), falling over 4.5% in five days. This adds to the 20.5% drop in 2Q, the biggest drawdown since 2011. As demand is expected to stay subdued, copper producers might consider hedges that provide downside protection. These might include applying simple hedges involving swaps to lock in a price or put options to establish a minimum price. One other possible strategy is a costless collar. In this case, a “zero-cost collar” creates a maximum and minimum price for a copper producer, as they would simultaneously buy a put option (creating a floor, or minimum) and sell a call option (creating a cap, or maximum). The call and put premiums offset, making the construction costless. It is popular because of the downside price protection, but you sacrifice access to much higher prices if prices should rise. Such positions are standard for producer hedging, but they can result in opportunity costs or cash costs if metal prices increase. Please contact AEGIS for specific strategies that fit your operations. (7/7/2022) |
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Note: Clients with AEGIS Platform access can see this and other research, plus hedge portfolio reporting and tools here. |
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Price Indications |
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Today's Charts |
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AEGIS Insights |
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07/06/2022: AEGIS Factor Matrices: Most important variables affecting metals prices 06/23/2022: What is Green Steel Anyways? |
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7/5/2022: Copper price lowest since November 2020 on economic slowdown worries 7/5/2022: Euro slides to 20-year low against the dollar as recession fears build 7/5/2022: Russia's Potanin weighs $60 billion metals merger as defence against sanctions 7/4/2022: Metals melt down as recession fears overwhelm supply woes 7/4/2022: Iron ore price tumbles as China’s demand outlook darkens |
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Important Disclosure: Indicative prices are provided for information purposes only, and do not represent a commitment from AEGIS Hedging Solutions LLC ("Aegis") to assist any client to transact at those prices, or at any price, in the future. Aegis makes no guarantee to the accuracy or completeness of such information. Aegis and/or its trading principals do not offer a trading program to clients, nor do they propose guiding or directing a commodity interest account for any client based on any such trading program. Certain information in this presentation may constitute forward-looking statements, which can be identified by the use of forward-looking terminology such as “edge,” “advantage,” “opportunity,” “believe” or other variations thereon or comparable terminology. Such statements are not guarantees of future performance or activities.
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