Primarily, copper is used for electrical applications, including power transmission, building wiring, pipes and electronic devices. The largest market share of copper is building construction, closely followed by electronics, transportation, industrial machinery and consumer goods. In particular, recycling copper by-products and obsolete items significantly boosts the copper supply.
Some will argue that demand for electric vehicles (EVs) will cause copper prices to reach all-time highs and then the moon. While anything is possible in these times, this is most likely not going to happen in 2024. Another factor to consider impacting the demand for EVs is the upcoming 2024 US Presidential election. Americans could have the choice instead of the requirement to own an EV, depending on who wins this election. Currently, copper will continue to see its highest demand in the construction industry.
Factors Affecting the Upcoming Home Building Season
Existing Home Sales
In September 2023, existing home sales in the US fell 2% to 3.96 million units, the lowest since October 2010, although slightly above the expected 3.89 million units. This decline coincides with rising mortgage rates, deterring first-time buyers and preventing existing homeowners with lower-interest mortgages from selling. The soft economy in some parts of the country also reveals consumer concerns about the looming recession in 2024.
Source: Federal Reserve Economic Data (FRED)
Existing home sales started 2023 with an increase and then trended down during the first nine months of the year. For the reasons above, there was little incentive to sell your home unless it was an emergency. Interest rates may fall depending on how hard the economy lands in the next recession, as the Federal Reserve (FED) will be forced to cut rates to stimulate the economy. Estimates for existing home sales in 2024 are for increases in available units.
Why would a decline in existing home sales be bullish for copper prices?
Building Permits
In October 2023, U.S. building permits increased 1.1% to 1.487 million, up from 1.471 million in September, according to preliminary data from the U.S. Census Bureau. The demand for building permits continues due to an existing housing shortage despite rising borrowing costs. With low inventory levels of existing homes available for sale, home builders have seen a significant influx of customers for new homes.
Source: Federal Reserve Economic Data (FRED)
FRED data shows that 2022 was a down year for building permits. For 2023, we see a slight increase for the year. Increasing building permits outpace demand for building materials needed to build homes, including copper wires and plumbing.
Until homeowners feel confident about the economy and see lower mortgage rates, currently around 7.5% compared to 2.65% in 2021, the inventory of existing homes will remain low. At the same time, this leaves home builders in a position to supply the current home buying market with new homes.
Some of us remember double-digit mortgages from the 80s; relatively speaking, 7.5% may not seem that high. But first-time home buyers only remember 2.65% interest rates and will probably hold out until a drop in current rates makes it more affordable.
Seasonal Pattern of Copper Prices
Much like the agricultural markets’ cyclical pattern of planting and harvesting crops at consistent times of the year, the copper market has a similar pattern, except it is the Spring new home building period. Because most of the country experiences winter weather during the first quarter of each year, new home construction increases in the Spring. However, copper wire and pipe manufacturers must start buying copper to produce these products that house builders will need in the late fall of the previous year.
Due to the cyclical nature of home construction, a reliable seasonal pattern develops in the copper market each year. Is it perfect? Not at all! But, the odds of it working outweigh that it doesn’t.
Source: Moore Research Center, Inc. (MRCI)
Due to the cyclical correlation between new home construction and copper prices, through extensive research, MRCI has identified a seasonal window where copper prices have risen for 13 of the past 15 years and three years have never had a daily closing low during the 13 year price range. is increasing A pattern with 87% occurrence is worth considering for further diligence and potential participation.
Seasonal buying window (yellow box) starts approximately November 21, 2023, and ends January 26, 2024. Seasonal windows are not a science and may start or end a few days before or after these dates. During this window, a trader could anticipate higher prices as long as their strategy confirms that direction. Sometimes, a seasonal window may create only one entry, while there may be multiple opportunities in others.
In Closing
Traders should monitor China’s faltering economy for any signs of improvement, as they may affect demand for copper. The US economy will not be spared from the coming global economic slowdown. Following trends in the economic reports, more than one report will be essential in copper demand patterns.
Copper is a leading industrial metal with a long-term trend in new home construction use. As traders, we need an edge to succeed in the markets. When markets exhibit these seasonal patterns with solid fundamentals supporting them, seasonal patterns could be considered fringe. At the very least, seasonal patterns can be used for market screening opportunities rather than just looking at a chart for setup.
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As of the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. For more information, please see Barchart’s Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.