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Did you know that copper was the first metal ever used and worked by mankind along with gold and dates back over 10000 years? Well, now you do! Over the years, the usage of copper has undergone major transformations, and today, it stands as a widely consumed metal. (It would get a bronze medal in the competition; by the way, bronze also has copper in its composition!)
You can find copper everywhere, from your refrigerators to your air conditioners! However, the most intriguing aspect of copper is that it is also traded as a commodity. So, how exactly is this copper traded? Check out this blog on copper futures to find answers to your doubts!
What are copper futures?
Copper futures are commodity derivatives. These are contracts that take place between two traders wherein they agree to purchase or sell copper as an underlying asset at a specified date in the future. In India, you can trade copper futures on the exchange called Multi-Commodity Exchange (MCX).
Copper futures trading occurs from Monday to Friday between 9:00 AM and 11.30 PM. These contracts begin on the first working day of the month and expire on the last working day of the month.
A copper futures contract is standardised with the copper future lot size being 2,500 kilograms. This means that you can only trade in multiples of 2,500 kilograms. The maximum order size is about 70,000 kilograms.
You also need to learn leverage to undertake copper futures investing. Leverage translates to trading the contract but putting up only a small fraction of the contract value, and this fraction is known as the margin. The minimum initial margin can either be 8% or based on the SPAN, depending on which is the larger amount.
Are things still fuzzy? Here is an example. Let’s say you are buying a contract worth 1 lot at Rs 720/kilogram as the base value. If you had to buy the entire lot, it would cost you Rs 18 lakh. However, with an 8% margin, you can trade this contract at just Rs. 1.44 lakh!
Finally, remember that the margin may change as per the current market value of the contract and thus always maintain funds in your account to avoid a margin call. Don’t worry; this is not always the case!
How to buy copper futures?
Trading copper futures seems promising, with estimations that the global demand for copper will rise by 20% by the time 2035 arrives. In terms of figures, the demand would increase to 30 million tonnes per year! For a better picture, think of it this way – with this metal quantity, you can build over 4000 Eiffel Towers!
With these insights, let us now look into how to buy copper futures and trade them on the exchange.
- Acquire knowledge and conduct market research
Before you begin trading, it is crucial to gain a fundamental understanding of how these copper futures work. Dive as deep as you can and figure out how copper futures work and what exactly drives and influences their prices.
That seems like a lot, but trust us, armed with this knowledge, you will feel more confident about trading in these markets!
- Choosing the right trading platform
Even with all the knowledge, you will find tons of difficulties if your trading platform is not user-friendly. So, when you are on the hunt for the right platform, ensure that services like customer support, seamless interface, and competitive brokerage rates are on top of your checklist.
- Deposit margins and start trading
Once your account is all set to go, ensure that you have sufficient margin before you start trading.
Based on your future perspective about copper prices, make a decision on whether to buy or sell copper futures, copper future lot size, expiry, and more.
- Trading copper futures
If you have purchased the lot, you might be wondering, “Now what?”. When this contract nears its expiration, you have two options.
Option 1: You can accept physical delivery of the commodities.
No, don’t panic. Most traders do not choose this option because buying a physical lot of 2,500 kilograms of copper sounds intimidating!
Option 2: You can roll out the position to next month or settle the trade with an offsetting position or a cash-based settlement before the expiry.
This means, you either get a profit if the trade is in your favour or have to accept a loss in an adverse market condition.
So this is how copper futures trading takes place in the market!
What affects copper prices?
Copper future price depends on various factors and is highly influenced by the global economy. There are a bunch of factors that should not escape your eye because they play a critical role in swaying copper futures prices.
- US Dollar
This is no surprise as copper, like other metals, always maintains an inverse relation with the US Dollar. If the US Dollar depreciates in the market, the copper metal price will soar.
This is because the depreciation of the US Dollar would mean that you have to spend less of your own currency to buy copper, and according to economics, an increase in demand = a rise in prices (at least in this case)!
- Supply vs demand
If there is a surplus of copper, the prices are likely to fall, and if there is a shortage, the prices will rise. The supply, again, is dependent on a multitude of factors. Similarly, a rise in demand will lead to a rise in prices, and you get the picture!
- Global economic growth
Wait, why is global economic growth on this list? Global economic growth indicates growth in construction and infrastructure projects, among many others, and these projects utilise extensive amounts of copper. Connect the dots, and you will see why copper prices will shoot up!
- Geopolitical events
If a country that has the largest share in producing copper gets involved in a trade war or any other emergency, it reflects on copper prices.
For instance, the 5-day protest that took place at Chile’s Escondida, the world’s largest copper mine in July 2011, led to a cut in as much as 3000 tonnes of copper in a single day! Such a big move impacts the overall copper market and trading activities.
It is better to stay updated with the present market trends, and most importantly, do not shoot arrows in the dark!
Finally, let’s end this blog with another cool fact about copper. About 80% of the copper mined from its ores is still in use. This is because 100% copper can be recycled! Well then, see you in the next one!
Conclusion
Remember that copper is a commodity. As a result, like other commodities derivatives, it is also subject to ups and downs and price volatility. When trading in copper, keep an eye on global events, especially the ones that will affect copper prices. Ensure that you are equipped with sufficient knowledge about copper futures and their historical trends, patterns, and other data before you start trading. To learn more about such exciting trading options, stay tuned for our Futures blogs!
FAQs
Copper futures are traded on many commodity markets. However, in the context of India, copper futures contracts are bought and sold in the Multi Commodity Exchange (MCX).
The profit of your trading depends on a variety of factors. For copper futures, supply and demand and market dynamics play an important role. It is suggested to research well and conduct technical analysis before trading in copper futures.
For trading copper futures, you are expected to maintain both initial and maintenance margins. While the maintenance margin is a certain percentage of the initial margin, the initial margin is the greater one among the 8% and Standard Portfolio Analysis of Risk (SPAN) margins.
Yes, there are other methods, such as trading through mining stocks and exchange-traded funds (ETFs), that offer alternatives to copper futures investing. These alternative trading options are readily available on various trading platforms.
In the case of copper futures contracts, you do not have to wait until the contract expires. Instead, you can exit the position by going for a settlement, which is a preferred method by many.
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