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Globe and Mail
12-05-2025
- Business
- Globe and Mail
Copper's Summer Slide: Can Traders Profit from July Futures' Seasonal Drop?
Copper, the metal that wires our homes and powers our tech, is facing a pivotal moment. The July copper futures contract, traded on the Chicago Mercantile Exchange Group (CME Group), shows signs of a seasonal sell pattern, backed by research from Moore Research Center, Inc. (MRCI). With London Metal Exchange (LME) inventories shifting, China's economy slowing, and money managers adjusting their positions, traders can act. Here's what you need to know about this opportunity, including the data, trader actions, and products to consider. MRCI's Seasonal Sell Pattern Moore Research Center, Inc. (MRCI), a trusted source for futures traders, has identified a historical sell pattern for the July copper futures contract. Their data shows that over the past 15 years, selling the July contract on May 20 has resulted in it closing lower on or about June 19 for 13 of the past 15 years (87% occurrence). This pattern stems from seasonal demand cycles, where industrial demand often slows in the Northern Hemisphere's summer after a robust pre-home building season accumulation, particularly in construction and manufacturing, which are heavy copper users. MRCI's research highlights that this sell window typically opens after the seasonal high in March, aligning with reduced physical demand. The logic is straightforward: copper demand dips as projects demand pauses for the summer, and traders who short the July contract may capitalize on this predictable price drop. While past performance isn't guaranteed, MRCI's quantified historical research makes this a compelling case for a short-term bearish play. Source: MRCI LME Copper Inventory Trends Recent London Metals Exchange (LME) inventory data supports the potential for downward pressure on copper prices. As of April, LME copper stocks stood at 430,000 metric tons, down from a high of 600,000 tons in August 2024 but still elevated compared to historical averages. The decline reflects increased Chinese imports, yet global stocks remain robust, with 67% of LME copper from Russian and Chinese origins, much of it undeliverable to the US markets due to trade restrictions. High inventories signal a looser physical market, which can weigh on prices when demand softens. The LME's cash-to-three-month spread has shifted to a contango of $34/mt in early April, indicating ample near-term supply compared to future delivery. This inventory cushion reduces the risk of a supply-driven price spike, reinforcing the seasonal sell thesis as demand will wane in the coming months. China's Slowing Economy and Copper Demand China, the world's largest copper consumer, is a key driver of global demand, accounting for nearly 50% of copper usage. However, its economy has been cooling, impacting copper prices. In Q4 2024, China's GDP growth slowed to 4.6%, down from 5.2% the previous year, driven by a persistent property market crisis and deflation risks. Industrial output, particularly in construction and manufacturing, has weakened, reducing copper demand for wiring and infrastructure. Despite stimulus efforts from Beijing, domestic consumption remains sluggish. The Yangshan copper premium, a gauge of China's import appetite, has risen to $93 per ton, showing some demand recovery. However, this is offset by high domestic production and exports of refined copper. In December 2024, China imported 398,000 tons of refined copper, a 13-month high, yet Shanghai Futures Exchange (ShFE) inventories dropped to 74,000 tons, suggesting stockpiling rather than robust end-use demand. The slowing Chinese economy, especially in copper-intensive sectors, aligns with MRCI's seasonal sell pattern. As summer approaches, reduced industrial activity in China could further depress demand, lowering July futures prices. COT Report: Money Managers' Positioning The latest Disaggregated Commitments of Traders (COT) report from the Commodity Futures Trading Commission (CFTC), dated May 6, 2025, reveals money managers' cautious stance on copper. Money managers hold a net long position of 23,338 contracts on the CME copper contract, down significantly from 70,504 contracts in February 2025. This reduction reflects fading bullish sentiment, with long positions slightly outweighing bearish bets. Short positions dropped from 53,207 contracts in February 2025 to 28,690, indicating less aggressive bearish conviction but a lack of strong bullish commitment. This balanced positioning suggests money managers are wary of macroeconomic risks, including potential US tariffs under President Trump and a global trade slowdown. Their retreat from copper aligns with the seasonal sell pattern, as funds may await clearer signals before re-entering the market. Traders can interpret this as a lack of upward momentum, supporting a short strategy for July futures. Source: CME Group Exchange Trader Actions Traders looking to act on this seasonal sell pattern have several options: Short the July Copper Futures Contract: Enter a short position around May 20, targeting a price decline by July 19. Use stop-loss orders to manage risk, given copper's volatility. Monitor LME inventory updates and Chinese economic data for confirmation of weakening demand. Spread Trading: Pair a short July futures position with a long position in a later contract, like September, to hedge against unexpected market moves. This leverages the seasonal dip while reducing exposure to broader price swings. Monitor Key Levels: Watch copper's support at $4.00 per pound and resistance at $5.00 per pound on the CME July copper contract. A break below support could accelerate the sell-off, while a move above resistance might signal a need to exit. Risk management is critical. Copper futures are highly leveraged, with a standard contract (25,000 pounds) requiring a margin of about $9,000. Micro contracts (2,500 pounds) require a margin of $900. Small price moves can lead to significant gains or losses, so position sizing and stop-losses are essential. Products for Trading Traders can participate using these CME products: Standard Copper Futures (HG): Each contract represents 25,000 pounds of copper; each tick (0.0005 per pound) is $12.50 in US dollars. Ideal for institutional and experienced traders. Micro Copper Futures (QL): A smaller contract of 2,500 pounds, with lower margin requirements, making it ideal for retail traders. Each tick (0.0005 per pound) is worth $1.25 per contract. Options on Copper Futures: Buy put options to profit from a price decline with limited risk, or sell call options to collect premiums if prices stay flat or fall. In Closing… The July copper futures contract presents a compelling seasonal sell opportunity, backed by MRCI's historical research showing a consistent price decline from mid-May to early July. Elevated LME inventories, a slowing Chinese economy, and cautious money manager positioning in the COT report reinforce this bearish outlook. Traders can act by shorting futures, using spreads, or monitoring key price levels, with standard futures, micro futures, or options as viable tools. While risks like geopolitical events or supply disruptions could alter the trajectory, the confluence of seasonal, fundamental, and market sentiment factors makes this a trade worth considering. Stay vigilant, manage risk, and let the data guide your moves.
Globe and Mail
05-03-2025
- Business
- Globe and Mail
Understanding the Spring Slump in Hog Prices – What Traders Need to Know
Historically, a predictable but often overlooked trend impacts hog prices, creating risks and opportunities for traders. From February through May, prices take a seasonal dip as an influx of hogs hits the market, driven by the fall pig crop reaching market weight. But supply alone isn't the only factor—weather conditions, growth rates, and shifting demand all play a role in this annual price movement. So, what exactly will contribute to this spring slump, and how can you use it to your advantage? The fall pig crop maturity: The fall pig crop, born in the later months of the year, reaches market weight around February-March, contributing to a surge in hog availability. The 2024 fall pig crop has had an opportunity to take advantage of lower feed costs (corn) than in the past. Could this add more weight as these hogs are brought to market? Larger spring pig crop: The spring pig crop is usually more significant than the fall crop, meaning more hogs will be ready for slaughter later in the year, further influencing the price decline in the early spring. Weather impact: Cold weather can slow pig growth rates due to increased energy demands for maintaining body temperature, reducing feed efficiency, and prolonging the time needed to reach market weight. However, once temperatures moderate, pigs experience compensatory growth, where improved feed conversion leads to a sudden surge in weight gain, resulting in a concentrated supply of market-ready hogs. This synchronized market entry amplifies supply pressures during the February-May period, further contributing to the seasonal decline in hog prices. Seasonal demand: Unlike beef, which sees stronger demand during the grilling season and holiday periods, pork consumption remains relatively stable, with no significant seasonal spikes between February and May. Additionally, export demand for US pork can weaken during this period as key importing countries adjust their purchasing patterns based on domestic production cycles and trade policies. With no significant domestic or international demand increase to offset the seasonal supply surge, hog prices face additional downward pressure during these months. This brings us to the recent Canadian and Mexican tariffs: The recent tariffs imposed on Canada and Mexico will dramatically impact exporting pork, considering Mexico is our most significant importer of US pork. Seasonal patterns: Source: Moore Research Center, Inc. (MRCI) MRCI research has found that hog prices peaked in February or March over the past 15 years before declining into the latter portion of May. The abovementioned fundamentals make it easy to see how this seasonal pattern evolved. As a crucial reminder, while seasonal patterns can provide valuable insights, they should not be the basis for trading decisions. Traders must consider other technical and fundamental indicators, risk management strategies, and market conditions to make well-informed and balanced trading choices. Source: Barchart The daily chart of the June Lean Hog futures contract shows last fall's seasonal low price followed by a rally to the February highs (green line.) After peaking in February, at contract highs for June, prices fell like a waterfall. Currently, hog prices are overextended to the downside and may need to rally to find more sellers to continue the current seasonal downtrend (red line.) The disaggregated Commitment of Traders (COT) report: Source: CME Group Exchange Like the grain markets, before they collapsed recently, pork producers aggressively sold (red bars) as the price (yellow line) rallied to $.92, holding 200K short contracts. While it's not unusual for producers to sell into rallies, it is interesting how aggressively they sold at lower prices than last year in the recent rally. During April 2024, prices rallied to $1.05, and they had 197K short contracts. Perhaps producers were already anticipating lower prices, and the idea of tariffs against Canada and Mexico made them sell more aggressively. Products for traders to participate in the lean hog trade: Futures traders can trade the standard-size 40,000-pound futures contract using the symbol (HE). There are no lean hog equity market products to trade. Two exchange-traded funds (ETFs) have lean hog futures contracts, which are considered commodity index funds, not just lean hogs. These products are the Invesco DBA and DBC ETFs. In closing….. Understanding the seasonal downturn in hog prices presents a valuable opportunity for traders who can anticipate and capitalize on these market movements. Historical trends and factors such as supply dynamics, weather impact, and shifting demand contribute to a predictable price decline from February through May. The additional influence of trade tariffs on key pork-importing nations like Mexico and Canada only adds complexity to this market shift. Traders can make more informed decisions when approaching this recurring cycle by carefully analyzing technical indicators, seasonal research, and market positioning through tools like the Commitment of Traders (COT) report. For those looking to participate, lean hog futures (symbol HE) provide a direct way to trade this seasonal pattern. At the same time, ETFs like Invesco DBA and DBC offer broader commodity exposure, including lean hog contracts. However, while seasonality provides valuable insight, traders must remain disciplined, integrating risk management strategies and other fundamental and technical factors into their trading plans. Those who recognize and react to these seasonal price shifts can position themselves advantageously in the lean hog market through futures or diversified commodity funds.
