The falling price of copper recently has been well documented in recent months, it's down just over 8% this year and at a 4-month low. Many experts saying that we won't see a price rebound until at least 2016. We decided to take a look at the main factors that move the price of copper, and see whether demand
Copper is one of the oldest metals known to humans. History has it that the metal has been used to make coins for over 10,000 years. Nowadays, the metal is used in a wide variety of industries. You’d find copper in most things from wires to pipes to heating and cooling equipment. Copper has also been used, historically, by traders who are looking to take speculative bets on the direction that the metal is headed. Here, we’ll look into the top factors that drive the price of copper.
On July 28 2014, Goldman Sachs released a research note on commodities. In the note, Goldman Sachs predicted that the global copper market is likely to witness a surplus of around 350,000 to 500,000 mt over 2014 to 2015. As a result, it predicted that the price of copper would drop below the price at that time, over a period of twelve months.
Surplus copper in the market means that the supply of copper exceeds its demand. The moral of that story for traders is that high surplus supplies often translate to a dip in the price of copper – just as it is with most commodities. On the other hand, any event that threatens the supply of copper a great deal is most likely going to cause a price hike.
There is a second side to the effect of supplies data on the price of copper, though. The chart above shows that after the release of that report, on July 27, 2014, the price of copper started dropping as early as July 28. As you might probably predict, the prediction in Goldman Sachs’ note hasn’t even manifest yet. That immediate impact can be attributed to the activities of traders who moved to protect themselves from the impending price decline. This led to an immediate change in the way the market values copper. The takeaway from here is that, when information about the supply of copper comes out from reputable sources, traders, most of the time, act to profit from the situation on ground, which would end up altering how the market views copper.
Emerging Market Demand
Usually, most of the demand for industrial metals comes from developed nations. And with the number of underdeveloped/developing nations outweighing the number of developed nations, there is a feeling that the demand for copper is at about the lowest level possible. In essence, as more countries transition into the developed stage, you can expect that the demand for copper would rise globally.
You want to note that transitioning into being a developed country means higher industrialization and urbanization. According to Commodity HQ, the demand for copper has surged in recent years as result of urbanization in emerging markets like China and India. In fact, analysts say that China is a now a big factor in determining the price of copper (more on that below). Here is a simple way to know how this would affect the price of copper. Whenever, improved economic data – like GDP growth and per capita income – come from the emerging markets (China, et al), you would be right to think that there would be a spike in the price of copper.
Demand outlook from China
Of course, we've already talked about China above. However, with the stature of its economy, it’s important to look at the area individually, instead of giving a generalist explanation, as news from the country can single-handedly move the price of copper upward or downward. You’d understand why when you consider that China consume about 40% of the world’s copper. The US is second behind China in the global ranks of copper consumption. Here are a few things to consider with respect to China.
A simple way to understand the effect of China on the copper market is by comparing China to the whole of North America. According to Oracle Mining Corp, North American consumers use about 10kg of copper per capita. However, in China, despite the huge economic growth in recent years, per capital consumption of copper still stands at about 5.4kg. This shows that there is huge room for improvement in the consumption of copper from China. Oracle Mining Corp says, “As China’s populace urbanizes, builds up its infrastructure and becomes more of a consuming society, copper consumption will likely approach or even surpass North American levels; the country’s rate of copper consumption is expected to increase 9% annually through 2016.” That alone sums up the effect that economic situation in china has on the price of copper.
Second, with China having a population in excess 1.3 billion, compared to 530 million people in North America, you should expect that any little increase in the demand from China would move the price of copper significantly. Here is a reference. Financial Times reported in early July that the decline in the price of copper in the first quarter of the year was sparked by events in China. FT says that China’s first domestic bond default raised fears about the economy and the possible unwinding of financing deals using copper as collateral. Just to keep it short, when predicting the direction of the price of copper you want to prioritize events in China.
As a result of the fact that a significant portion of global supplies of copper come from South America, supply disruptions – or the fear of it – in the region can affect global prices a great deal. For instance, events like strike at mining sites and natural disasters – landslide, for instance – are quite common in the region. All of these events threaten supplies from the region can push prices higher if they occur. As a reference, you want to bear in mind that the Chile and Peru combined account for about 40% of the world’s proven copper reserves – and about 42% of the world’s total copper production.
The last main factor involves the possibilities of substituting copper. In order to reduce productions costs, industries that make use of copper have sought cheaper metals that can be used in place of copper. For instance, aluminum is now used in power cables, electrical equipment, automobile radiators and cooling tubes. In summary, the more the availability of substitute metals, the more the pressure that would be on demands for copper, which would make the metal cheaper.