By Noble Drakoln

C
opper is a metal that has been known all around the world since ancient times. From West Africa to China to Europe to Central and South America, copper has been mined and worked continuously from as far back as 8,700 BC. As one of the few independently occurring metals, copper has been used in a multitude of forms, from prehistoric pendants to modern-day piping and more.

As a highly versatile material, copper can conduct electricity and is a necessary trace mineral in all living things. It also possesses the ability to destroy germs on contact. Copper is mined in large open pits, and Chile and the U.S. have extensive reserves that could be exhausted within the next 50 years. The New York Mercantile Exchange (NYMEX), where copper contracts are traded, states that copper is the third most widely used metal in the world. (Find out how Yasuo Hamanaka's actions in the copper market forever changed the rules for commodity traders, in The Copper King: An Empire Built On Manipulation.)

A sample commodity futures contract for copper is shown in the following table.

Copper Contract Specifications
Ticker Symbol
Open Outcry: HG (NYMEX)
Electronic: EHG
Contract Size 25,000 pounds
Deliverable Grades Grade 1 electrolytic copper conforming to the specification B115 as to chemical and physical requirements, as adopted by the American Society for Testing and Materials, and of a brand approved and listed by the Exchange.
Contract Months All months
Trading Hours NYMEX Open Outcry: Monday-Friday
CME Globex Electronic: Sunday-Friday 6
Last Trading Day Trading terminates at the close of business on the third to last business day of the maturing delivery month.
Last Delivery Day Last business day of the delivery month.
Price Quote U.S. cents per pound.
Tick Size 0.0005 per pound = $12.50/contract, 1 cent = $250/ contract

Daily Price Limit
(Not applicable in electronic markets)
  1. Initial price limit, based upon the preceding day\'s settlement price, is 20 cents per pound.
  2. Two minutes after the two most active month\'s trade at the limit, trading in all months of futures and option will cease for a 15-minute period.
  3. Trading will also cease if either of the two active months is bid at the upper limit or offered at the lower limit of two minutes without trading. Trading will not cease if the limit is reached during the final 20 minutes of a day\'s trading.
  4. If the limit is reached during the final half hour of trading, trading will resume no later than 10 minutes before the normal closing time.
  5. When trading resumes after a cessation of trading, the price limits will be expanded by increments of 100%.

Understanding Copper Contracts
Like every commodity, copper has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and loss.

For instance, if you buy or sell a copper futures contract, you would see a ticker tape handle that looks like this:

HG8H @ 371.65

This is just like saying "Copper (HG) 2008 (8) March (H) at $3.7165/per pound." (It is standard pricing convention to see the prices of futures such as copper, coffee, sugar and orange juice quoted in cents per pound. In this case, $371.65 is equal to $3.7165/pound.) A trader buys or sells a copper contract according to this type of quotation.

Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the copper contract equals the equivalent of 25,000 pounds multiplied by our hypothetical price of $371.65, as in:

$1,950 x 50 troy ounces = $92,812.50

Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. To trade a copper contract on NYMEX requires a margin of $7,763, which is approximately 8% of the face value.

Calculating a Change in Price
Because commodity contracts are customized, every price movement has its own distinct value. In a copper contract, a .0005 cent move is equal to $12.50, and a .01 cent move equal $250. When determining copper profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the result by $12.50. For example, if prices move from $371.65 to $340.10, you divide the difference, which is $31.55, by five and then multiply the result ($631) by $12.50 to yield a contract value change of $7,887.50.

- Buy Sell Total Value
Copper Contract Price (.0005 cent move = $12.50) $3.7165 $3.4010 31.55 cents or $7,887.50


Copper Exchanges
The futures contract for copper is traded at the New York Mercantile Exchange (NYMEX) through its Commodity Exchange (COMEX) division and London Metal Exchange (LME).

Facts About Production
Copper is extracted from open pit mines, which also processes molybdenum (an element used to strengthen steel) as a byproduct. The demand for copper in India and China plays a significant role in determining when, not if, copper reserves will be depleted. Current copper calculations suggest that the earth will run out of copper in as little as 61 years. Lester Brown, an environmental analyst, believes that the number may be as low as 25 years if current copper demand continues.

Factors that Influence Copper Price
The price is influenced by the following factors:
  • The Copper Development Association (CDA) has gained approval from the Environmental Protection Agency (EPA) to list copper alloys as antimicrobial. This is the first time that the EPA has approved a solid material in this fashion, which could lead the way for increased demand for copper in germ-sensitive areas.
  • Copper is an integral part of printed circuit boards, lead free solder, microwave ovens, wave guides, integrated circuits, electromagnets, wiring and piping.
Conclusion
Copper is an industrial metal essential to urban modernization. While countries such as China and India strive to develop a western lifestyle, the need for copper will likely increase at the expense of a dwindling supply. As alternatives are found to replace copper's applications, the price of copper will continue to be volatile.

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