How Does Buying Copper Futures Work?

How Does Buying Copper Futures Work?
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Just as all commodities prices are sensitive to market conditions, copper futures prices are subject to the ebb and flow of world events and investor sentiment. As of March 2013, copper futures have been responding to economic data that have pulled its price in different directions. Manufacturing reports from copper's largest consumer, China, hint at manufacturing expansion, boding well for the increased use of industrial copper and potentially higher prices, yet political instability in the Eurozone due to a Cyprus bailout might put a damper on those gains. These are the factors that you must consider if you are looking to buy copper futures.

When and Why to Buy Copper Futures

There are a number of reasons and occasions when buying copper futures might make sense. You might be a manufacturer who uses copper extensively and would like to hedge against price increases in copper when it comes time to buy. Or you could be a speculator who is observing the copper markets and believes prices will go up in the near future, at which point your having bought copper futures in advance can mean profiting from any increase that does occur. On the other hand, your prediction might not materialize, in which case, a decrease in price can result in losses if you decide to sell your futures.

Mechanics of a Trade

You can buy and sell copper futures through several venues, namely the U.S.-based Chicago Mercantile Exchange CME Group or the London Metal Exchange (LME), as well as the Multi-Commodity Exchange (MCX) in India. The CME lists brokers who can help you with these transactions. When buying through CME, or more specifically, COMEX, purchasing a copper contract with the ticket symbol HG requires paying a set amount, or as of March 2013, an initial margin of $3,410 for 25,000 pounds of Grade 1 Electrolytic Copper Cathodes, which will result in physical delivery at expiration unless the contract is sold. You can buy a contract for any of the future months listed. Price fluctuations per pound are based on $0.0005, hence a price quote would be a multiple of this, thus a 1 cent change would signify $250. The cost of margin is relatively small compared with the total value of copper the contract represents. Trading hours for copper on the electronic CME Globex and Clearport are Sunday to Friday, 6 p.m. to 5:15 p.m. (5:00 p.m. to 4:15 p.m. Chicago Time/Central) with a 45-minute break each day beginning at 5:15 p.m. (4:15 p.m. Central); for open outcry, the hours are Monday to Friday, 8:10 a.m. to 1 p.m. (7:10 a.m. to 12:00 p.m. Central).

Margin and Other Requirements

When dealing with futures in general, you will find that margin requirements are key to making the trade. Not only will you have to post margin, or a good faith deposit to back up your purchase, but you also will have to maintain a certain level of margin throughout the life of the contract. With copper futures, the maintenance margin is $3,100. Thus, if your account dips lower than this amount, you must replenish those funds if you want to keep the account. Other exchange rules for copper are listed in Section 111 of the New York Mercantile Exchange (NYMEX) Rulebook, which discusses procedures and standards of delivery.

Copper Futures on Other Exchanges

If you choose to buy your copper futures on other exchanges, be aware of the different units and/or stipulations those copper contracts use. On the LME, a copper contract, while denoted in dollars and cents, refers to 25 tonnes, or 55,116 pounds of Grade A copper. Moreover, margin requirements, rules and trading hours will be based on the LME system. To buy a copper contract on LME, you would need to post margin at $520 per tonne.