Analyzing the Interdependence between Copper Base Metal and Brass Scrap over the past 10 years (2011-2021) that helps to predict the Brass Scrap Price based on COMEX EOD (End of Day) prices of primary Copper.
Author: Jenisha. R
Research: Rakesh, C.G.Nadar
Commodity: Copper Base Metal and Brass Scrap
Data: COMEX Copper EOD, 2011 -2021, RIM Brass Scrap Prices 2011-2021
Technology: Scikitlearn and Numpy
Research Methods:
- Linear Regression
- Ordinary Least Square (OLS)
- Granger's Casualty
Introduction
This research aims to study how the Copper (base metal) prices are linked to Brass Scrap prices over time. The tests are run with a long term time series (10 years) price linkage and causalities among the Copper futures, primary and Brass Scrap markets.
Brass Scrap is a term used to describe a wide variety of Copper and zinc alloys. From locks, gears, doorknobs, and valves to plumbing fixtures, electrical appliances, and musical instruments, Brass can be found in most items we encounter at home, at work, and everywhere else. It's important to know that proper disposal through brass recycling must be ensured once we have no use for these items so other people can still benefit from this substantial alloy. Considering the usefulness of Brass, many manufacturing companies seek as many sources for this golden alloy. Instead of creating new metals, brass recycling can ensure a ready supply to suit the production needs.
This makes the correlation between primary Copper metal and Brass Scrap prices stronger than the prior 2000 scenario. We will examine the interdependence between the Copper base metal and Brass Scrap over the past ten years (2011-2021), which helps to predict the Brass Scrap price based on COMEX EOD (End of Day) prices of primary Copper. Analyzing the Copper primary and Brass Scrap correlation will help to calculate the Brass Scrap prices from the primary market price. This will provide valuable insights to Brass Scrap producers, traders, exporters, importers and Brass recycling companies.
Data and Research for Correlation Between Primary Copper & Brass Scrap
This research helps to find the connection between primary Copper price and Brass Scrap price. The periods used for this research are 2011-2021. The COMEX Copper EOD price is used to represent the primary Copper price. Average weekly, monthly, quarterly and yearly Copper prices are derived from the COMEX Copper data. COMEX Copper prices are in USD/lbs. These prices are converted to USD/MT to simplify the export-import prices of Brass Scrap, which is calculated USD/Ton.
The Brass Scrap prices are obtained from recycleinme.com for the same period (2011-2021). This price is also averaged for weekly, monthly, quarterly, and yearly averages compared to COMEX's primary Copper prices. Ordinary Least Square (OLS), Linear Regression and Grangers Casualty tests confirmed the correlation between the primary Copper and Brass Scrap prices.
Linear Regression - Definition
In statistics, linear regression is a linear approach to modeling the relationship between a scalar response and one or more explanatory variables (also known as dependent and independent variables). The case of one explanatory variable is called simple linear regression for more than one; the process is called multiple linear regressions. This term is distinct from multivariate linear regression, where multiple correlated dependent variables are predicted, rather than a single scalar variable.
Data Preprocessing
The dates which are not matching in base metal and Brass Scrap prices are removed and so are the NULL values.
df.isnull ().sum ()
date 0
close price 0
brasscloseprice 0
dtype: int64
We have removed all the mismatching dates and null values from the data. While analyzing yearly data, 2021 data had a separate trend line, so we used 2021 data to predict better. By plotting this data, we get
Graphical Representation of Primary Copper Price VS Brass Scrap
The patterns are virtually identical for both Copper primary and Brass Scrap. This indicates the linkage of Brass Scrap prices with primary Copper.
Granger’s Causality - Definition
The Granger causality test is a statistical hypothesis test for determining whether one time series is useful for forecasting another. If probability value is less than any alpha level, then the hypothesis would be rejected at that level. We used the Grangers causality test to determine the correlation between the base copper price with Brass Scrap price for the given time series.
When time series X Granger-causes time series Y, the patterns in X are approximately repeated in Y after some time lag (two examples are indicated with arrows). Thus, past values of X can be used for the prediction of future values of Y.
Result of Granger's Causality Test
Let’s use Granger’s Causality test to check the affiliation between the Base metal close price and Brass Scrap close price.
For instance, let’s take the value of 0.0001 from row 1 and column 2; it refers to the p-value of brasscloseprice_x causing Base metal close price_y. Whereas the 0.0 in row 2, column 1 refers to the p-value of brasscloseprice_y causing Base metal close price_x.
The P-Value of 0.0001 at row 1, column 2 represents the p-value of the Grangers Causality test for Brass Scrap close price_x causing Base metal close price_y, which is less than that of the significance level of 0.05. So, let’s reject the null hypothesis and conclude Grangers Causality test for brasscloseprice_x causing Base metal close price_y.
Ordinary Least Square (OLS) - Definition
In statistics, ordinary least square (OLS) is a type of linear least squares method for estimating the unknown parameters in a linear regression model. OLS chooses the parameters of a linear function of a set of explanatory variables by the principle of least squares: minimizing the sum of the squares of the differences between the observed dependent variable (values of the variable being observed) in the given dataset and those predicted by the linear function of the independent variable.
Result of OLS Regression
We get an R-squared of 0.946. Thus, we can conclude this model explains 94.6% of the variation in the data.
Predicted Value of Brass Scrap Price from Base Metal Copper Price
Plot for COMEX Price, Brass price and Predicted Brass Price
Conclusion:
The Ordinary Least Square (OLS) model predicts the Brass Scrap prices with an accuracy of over 96%. RIM research team, with the help of our AI wing, continues research on Copper Scrap prices, and we will update it here as and when we get sustainable results. Subscribe for Current Brass Scrap prices and Base Metal Prices.