After a brief correction in February, copper prices began a new rally, closing at $9,142 a tonne on February 22, with the Shanghai copper main contract up by the daily limit of 67,370.

The fundamentals have not changed much in the current rally. The domestic low-season accumulated stocks are lower than expected, global stocks are low, overseas vaccination promotion and short-term supply is tight, the current situation of the industry supports copper prices higher, but even such fundamentals, copper prices at the end of January, there is still a big adjustment. So we need to focus more on non-fundamentals as we re-examine this rally. On February 5th the US Senate passed a budget resolution paving the way for passage of the Biden administration's $1.9 TN fiscal stimulus bill. Spurred on by the News, global capital markets opened a new round of "carnival" , copper prices also opened up the road to a surge.

1.Commodity attribute and financial attribute

Commodities generally have the dual characteristics of commodity attribute and financial attribute. Commodity attributes generally refer to the supply and demand structure of commodities as physical objects, which can be reflected by the balance table of supply and demand.

The property of finance embodies the property of commodity, which mainly provides the function of keeping value, increasing value and financing for the holder. Because of the differences in the scarcity, liquidity and storability of different commodities, the advantages and disadvantages of different commodities as an asset are different, and the financial attributes of different commodities are different. Generally speaking, the loose monetary environment is the most active period of the commodity finance attribute. From the Monetary Angle, the commodity finance attribute can be understood as the concrete embodiment of the monetary phenomenon among different commodities.

According to the attribute of commodities and the attribute of finance, we can logically regard the attribute of commodities as the trend factor of commodity prices, which determines whether commodity prices will go up or down in the general direction, while the attribute of finance is the fluctuation factor, determine the extent to which commodity prices rise or fall. Financial attribute is often the "magnifying glass" of commodity attribute.

2.Characteristics and assets of copper

Copper is one of the first metals to be used by humans and is one of the most widely used metals. Its excellent electrical and thermal conductivity makes it the most commonly used material in cables, electrical and electronic component, its use as building material also has certain superiority. With the expansion of the global trade volume, copper has become a common pledge, with a better function of financial intermediation, and, like other metals, copper also has good storability.

In addition, copper is scarce. On the one hand, the world's copper resources are limited. According to the United States Geological Survey (USGS) , in 2020, only 870 million tons of the world's proven copper resources were stored, based on annual production of nearly 20 million tons, on the other hand, the global energy structure is undergoing profound changes and the share of clean energy is increasing year by year, which is expected to stimulate a large amount of demand for copper, the bright prospect of demand has also led to increased copper scarcity.

Above several characteristics, make copper has better assets, in the environment of loose currency, copper also has a better preservation and appreciation function.

3.The financial attribute of copper

The financial attribute of copper is closely related to the monetary environment, and it is highly correlated with exchange rate, interest rate and other factors. Under the current International Monetary System, the trend fluctuation of US interest rate and US dollar exchange rate is an important source of the financial attributes of commodities. This paper also compares the price of copper with the price of Bitcoin to judge the financial attribute of copper, because Bitcoin has both monetary attribute and financial attribute, is more sensitive to the monetary environment, is an important indicator of the strength of financial attribute of the market.

The correlation between copper prices and the US federal funds rate is not high, especially since 2009, when the US federal funds rate has remained low and copper prices have been more volatile. During the period of the federal funds rate trend in the United States, the copper price and interest rate show a strong positive correlation, which shows that the financial attribute of copper does not occur at the time when the interest rate changes, but after changes in interest rates cause changes in economic conditions or economic expectations.

As a more direct reflection of liquidity, the dollar index and copper price movements showed a strong correlation. Copper tends to strengthen when the dollar is weak, and to weaken when the dollar is strong. It shows that the financial attribute of copper is more outstanding when the trend of US dollar changes.

4.The financial nature of copper

When evaluating the financial attribute of commodities, we can use the ratio between the position of commodities in financial market and their physical demand to evaluate the change of strength or weakness. This paper uses the ratio of non-commercial Holdings to physical demand published by the Commodity Futures Commission (CFTC) and the London Mercantile Exchange (LME ) to measure the strength of copper's financial properties.

In terms of the financial properties of copper, as measured by the net position of CFTC funds (in absolute terms) and the ratio of the annual consumption of refined copper, the financial properties of copper have fluctuated sharply. Since 2020, the financial properties of copper have significantly strengthened, at present, the financial attribute is in the strongest stage since the 21st century, which is similar to the strong financial attribute from 2003 to 2004. Compared with gold and silver, the financial attribute of gold and silver is significantly stronger than that of copper in history. Among the precious metals, silver has the most volatile financial properties, while gold has fallen from its peak since the beginning of 2020, while silver and copper have gradually strengthened their financial properties since the second quarter of 2020.

Using the ratio of LME Holdings to consumption to assess the strength of financial Non-ferrous metal, nickel and zinc have been the strongest, copper and aluminum the second, and lead and tin the weakest since 2018. Since 2020, the financial properties of zinc, copper and nickel have increased significantly, while those of other metals have changed relatively little. In the strong-weak relationship, copper is one of the most financially strong Non-ferrous metal when other market positions in copper, such as COMEX, are considered. The recent sharp rise in copper prices owes much to the strengthening of its financial properties, which are at their strongest stage in many years. The future copper price trend needs to pay close attention to the financial attribute change.

 Source: Minmetals Economy, edited by Wu Kunjin