Here an excellent report from the global BarCap Commodities team.
They cover the major commodities markets from a fundamental and technical indicator correlative basis.
Their comments on the copper market goes some way to explain the divergence we see between prices for copper related equity themes and the underlying.
Its worth just explaining/unpicking this linkage between the corporate equity prices and the underlying metals as its something that occurs over and over again.
The equity prices rise and fall on the basis of forward expectations of demand and geopolitical moves. They are perhaps 3 to 6 months forward looking. The underlying commodity prices are much more near term reactive instruments. To play the forward curve forward contracts can be bought or sold and its fair bet to say the under lying metal futures and options contracts can often offer a better way of playing a shift in forward 3 to 6 month expectations than equities can though this relationship shifts and needs to be watched.
Here forward copper futures prices:
http://quotes.ino.com/exchanges/contracts.html?r=NYMEX_HG
As an example, at present, copper forward prices 6 months out show backwardation of 5% yet the copper equities have bounced 25% in value in the last couple of months due to some optimism as BarCap refers to on the demand side. Speculators are faced with a question. Which price is correct? One of the instruments is mis-priced here. Which is it? Should you go short the copper miners or long the forward copper futures or options?
Its not a trade i’m involved with at present but I flag it as an example. Hedge funds often take both sides. Ie, playing the spread. Ie perhaps short the miners (as yield is low) and long the futures 6 months out as backwardation. If the spread narrows they win. The reason I post this example up is simply to show some alternative trading plays outside of mere directional strategies. Professional traders and speculators generally ‘bet’ on something other than pure directional only trades, note. I hope this sparks some interest.
Here the commodity report:
Rich