Thursday, November 30, 2023

Will Home Builders Replenish Demand for Copper?

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Primarily, copper is harnessed for electrical applications, including power transmission, building wiring, pipes, and electronic devices. The largest market share of copper is building construction, closely trailed by electronics, transportation, industrial machinery, and consumer products. Notably, recycling copper byproducts and obsolete items significantly bolsters the copper supply.

Some will argue that the 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 most likely will not happen in 2024. Another factor to consider impacting the demand for EVs is the upcoming 2024 US Presidential election. Americans might have the option instead of the requirement to own an EV, depending on who wins this election. For now, copper will continue to see its highest demand in the building industry. 

Factors Impacting the Upcoming Home Building Season 

Existing Home Sales  

In September 2023, existing home sales in the United States dropped by 2% to 3.96 million units, the lowest since October 2010, though slightly above the expected 3.89 million units. This decline aligns with rising mortgage rates, deterring first-time buyers and hindering existing homeowners with lower-interest-rate mortgages from selling. The softening economy in some regions of the country also reveals consumers’ concerns about the looming recession in 2024. 

Source: Federal Reserve Economic Data (FRED) 

Existing home sales started 2023 with a spike up and then trended down for the first nine months of the year. For the above reasons, there has been little incentive to sell your home unless it was an emergency. Interest rates may decline depending on how hard the economy lands in the upcoming 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 units available. 

Why would a decline in existing home sales be bullish for copper prices? 

Building Permits 

In October 2023, US building permits increased by 1.1% to 1.487 million, surpassing September’s 1.471 million, per preliminary data from the US Census Bureau. The demand for building permits persists 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)

Data from FRED shows 2022 was a downtrend year for building permits. For 2023, we are seeing a slight uptrend for the year. Increasing building permits precedes demand for building materials needed to construct homes, including copper wires and plumbing pipes. 

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 buyer market with new homes. 

Some of us remember double-digit mortgage rates from the 80s; relatively speaking, 7.5% may not seem all that high. But, first-time home buyers only remember 2.65% rates and will probably hold out until a decline from current rates is more affordable. 

Seasonal Pattern of Copper Prices 

Much like the agricultural markets’ cyclical pattern of planting crops and harvesting crops at consistent times of the year, the copper market has a similar pattern, except it’s the Spring new home construction period. Due to most of the country experiencing winter weather during the first quarter of each year, new home-building surges in the Spring. However, copper wire and pipe manufacturers must begin purchasing copper to produce these products home-builders will need in the late Fall of the preceding year. 

Due to home construction’s cyclical nature, a reliable seasonal pattern is formed in the copper market each year. Is it perfect? Absolutely not! But, the probability of it working outweighs it not working. 

Source: Moore Research Center, Inc. (MRCI) 

Due to the cyclical correlation between new home building 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 never had a daily closing drawdown during the 13 years of price increases. A pattern with 87% occurrence is worth considering for further due diligence and possible participation. 

A seasonal buy window (yellow box) begins on approximately November 21, 2023, and ends on January 26, 2024. Seasonal windows are not science and may start or end a few days before or after these dates. During this window, a trader could anticipate higher prices provided their strategy confirms that direction. Sometimes, a seasonal window can create just one entry, while there may be multiple opportunities in others.

In Closing 

Traders should monitor China’s floundering economy for any signs of improvement, as they can impact the demand for copper. The US economy will not be spared the upcoming 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 be successful in the markets. When markets exhibit these seasonal patterns with sound fundamental reasons supporting them, seasonal patterns could be considered an edge. At the least, seasonal patterns can be used for market screening opportunities rather than just looking at a chart for a setup.
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On 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 solely for informational purposes. For more information please view the Barchart 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.

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