The London Metal Exchange is one of the hot spots of the global metal trade. Among the most important products at the LME is copper, with futures on the red metal (grade A) traded alongside options. The lot size of a futures contract is 25 tonnes, while the pricing refers to one tonne. Volumes for the most vital industrial metal have picked up sharply in recent times: in May 2024 the LME handled just under 180,000 copper futures on average every day of trading, nearly 30% more than in the same month the previous year. At its peak daily turnover even exceeded a quarter of a million contracts. The brisk trade is being accompanied by a marked spike in prices. On 20 May 2024, one tonne of copper cost more than USD 11,000 for the first time. That meant the three-month future had become nearly 30% more expensive compared with the level at the end of 2023.
The situation has calmed down since then, with the price of copper falling significantly as trading volumes declined. Since the raw material had increasingly been overbought, the correction is only healthy. From a fundamental viewpoint, reports suggesting that the copper market was oversupplied at the start of the year put the brakes on prices. This does not in any way change the central argument for rising prices: structural growth in demand for copper alongside a range of problems in mining. The metal could therefore remain a scarce commodity. Demand for refined copper had exceeded supply in every single year since the financial crisis in 2009. It remains to be seen, however, whether the current correction has run its course. The new bonus certificate with cap could be of interest to investors who are grappling with this question. Leonteq offers a partially protected position in the raw material of the hour.
The product is based on the LME Copper Future mentioned above. Should the futures contract gain in value over the next two years, the certificate would share in the price increase. The participation rate is 100% of the positive movement, but the gain is limited to the cap. The maximum amount has been fixed at 130% of the initial level of the underlying, which means that investors can take advantage of a rise in the price of copper to just under the USD 13,000 per tonne mark. This opportunity comes with a high security level in the form of a barrier at 75% of the initial level. The European option integrated into the structure ensures that this threshold will only be activated at the end of the term – changes in the price until then will be irrelevant. As long as copper is trading above the barrier level on the valuation date, the bonus mechanism kicks in, with investors receiving a 100% repayment.
Should the raw material cheapen by 25% or more within two years, the protection falls away. In this scenario repayment of the product would be linked directly to the underlying – so investors would have to absorb losses. Please also note that the modalities outlined do not come about until maturity. A variety of parameters will have an effect on the price level during the term. The price on the secondary market may therefore fall well below the 100% threshold even though copper is trading above the barrier. This notwithstanding, the bonus certificate with cap offers the opportunity to benefit from a continuation of the upward movement of the red metal. In addition to the long-term demand drivers, the performance of the economy in the short term also has a significant bearing on the underlying. To that extent the issue is also and especially interesting for investors with a positive macroeconomic scenario.
We look forward to answering all of your questions about our products and how they are traded. Please don't hesitate to get in touch! Phone: 058 800 11 11, email info@leonteq.com or contact us here.