Copper hits record high on demand hope, tight supply

The previous copper record was set in 2011, around the peak of the commodities supercycle sparked by China’s rise to economic heavyweight status — fueled by massive amounts of raw materials. This time, investors are betting that copper’s vital role in the world’s shift to green energy will mean surging demand and even higher prices. Copper futures rose as high as $10,440 a ton in London on Friday. 

What’s the big deal about copper?

Copper is a chemical element with the symbol Cu. It is a soft, malleable, and ductile metal with very high thermal and electrical conductivity. A freshly exposed surface of pure copper has a pinkish-orange color. 

Through human history, copper has played a critical role in many of civilization’s greatest advances: from early monetary systems to municipal plumbing, from the rise of trains, planes, and cars to the devices and networks that underpin the information age.

The reddish-brown metal is mostly unrivaled as an electrical and thermal conductor, while also being durable and easy to work with. Today, a vast array of uses in all corners of heavy industry, construction, and manufacturing mean it’s a famously reliable indicator for trends in the global economy.

The pricing of silver and copper is affected by the balance of supply and demand. Silver, copper, and crude oil will perform better than gold during the economic upturn, while gold is more stable during the financial crisis.

Just like spot gold (CFD) and spot silver (CFD), investors can also make a profit through spot copper (CFD) and trade in both directions.

What factors affect the price of copper?

1.Economic activity

The copper price is often given the moniker “Dr. Copper” to describe the red metals' supposed omniscience in gauging developments in the global economy. Within the manufacturing sectors, copper is widely used in machinery and is also turned into end products and semi-manufactures like pipes and tubes. Because it acts as an effective conductor of heat and electricity, copper is also used in the installation, energy, and telecommunications sectors. Meanwhile, as a good conductor of heat, it is also widely used in the transport equipment industry.

2. US dollar

Like most internationally traded commodities copper is priced in US dollars. At its most basic a decrease in the value of the US dollar relative to a commodity buyer’s currency means that the purchaser will need to spend less of their own currency to buy a given amount of the commodity. As the commodity becomes less expensive demand for the commodity rises, resulting in an increase in the price and vice versa.

3.Copper mine supply

Copper ore production is concentrated in South America, particularly in Chile which accounts for around one-third of the global mined copper supply. The supply of copper ores, the quality of the ores, and the costs of extracting them also have an impact on the copper price. Meanwhile, unforeseen events like worker strikes, earthquakes, bad weather, and geopolitical instability can force copper prices upwards.

4.Oil prices

The refining of copper is above all an energy-intensive process. Energy costs account for approximately 30% of the total cost of extracting the ore, and these costs can rise to 50% during the processing of the ores (smelting and refining). When the oil price rises, energy costs will go up, and the copper price may rise too.

The copper market was one of the first to react as the Covid-19 coronavirus emerged in Wuhan, with prices slumping by more than a quarter between January and March last year. Then as China’s unprecedented steps to control the domestic spread of the virus started to yield results, copper rapidly rebounded -- and it hasn’t looked back since.

But it’s not just China driving the rally. While the country accounts for half of the world’s copper consumption and has played an integral part in copper’s surge, demand there has actually softened this year. Yet prices continue to drive higher.

Why is copper surging now?

It’s partly due to evidence of recoveries in other major industrial economies, with manufacturing output surging in places like the U.S., Germany and Japan. 

But investors have also been piling into copper on a bet that global efforts to cut carbon emissions are going to mean the world needs a lot more of the metal, putting a strain on supply. New mine production may be slow to arrive, as mines are hard to find and expensive to develop.

Electric vehicles contain about four times as much copper as a conventional car, and vast amounts of copper wiring will be needed in roadside chargers to keep them running. Bringing electricity from offshore wind farms to national power grids is also a copper-intensive exercise.

Governments around the world have announced ambitious infrastructure investment plans, much of which involves construction, green energy, or both.

Are things that use copper getting more expensive?

Increasingly, yes. Major manufacturers have been hiking prices for air-conditioning units and fridges over the past few months, and they’re warning there may be more to come.

Still, copper is often used in small quantities in complex consumer goods, and so the doubling in prices over the past year won’t be nearly as painful for consumers as an equivalent jump in food or fuel prices would be. Similarly, governments rolling out big spending programs might not be too worried about a rise in copper alone.

But with other raw materials rising too, there are growing signs that they’ll get less bang for their buck as the cost of big-ticket items like wind turbines rise.

What does it mean for the economy?

There are mounting concerns that the broad rally in everything from lumber to steel will force central bankers to step in to stop inflation in raw-materials markets spiralling out of control.

The surge in commodities is fueling a rise in inflation expectations

In turn, the stellar economic rebound that’s driving the commodities rally may start to stall as businesses are hit by higher interest rates, compressed margins, and waning demand from consumers. The key question for policymakers at the Federal Reserve — and traders on Wall Street — is whether the broad spike in commodities prices will be temporary.

Could the rally fizzle out?

In the case of copper, there are some signs that spot demand is starting to cool, particularly in China, and some analysts and traders say the record prices aren’t justified by today’s fundamentals.

The view among policymakers is that the rise in commodities prices will prove short-lived, as consumers will focus their spending on services and experiences as economies open up, easing the strain on demand for commodities-intensive items such as second homes, electronics and appliances seen during the lockdown.

For copper though, it’s not just about strong demand today. In fact, a lot of expected spending on renewables and electric-vehicle infrastructure is yet to really materialize. When it does, it could transform the outlook for copper usage in countries such as Germany and the U.S.

How high could copper go?

Trafigura Group, the world’s top copper trader, and Goldman Sachs Group Inc. both say prices could hit $15,000 a ton in the coming years, on the back of a global surge in demand due to the shift to green energy. Bank of America says $20,000 could even be possible if drastic issues arise on the supply side.

Saad Rahim, Trafigura’s chief economist, on "Bloomberg Daybreak: Europe."

The copper market itself may also be facing a big shift. Trafigura predicts that demand growth in China will be eclipsed by rising consumption in the rest of the world over the coming decade, in a dramatic reversal of the recent trend. That could help underpin a new “supercycle” in the copper market, driving prices higher for years on the back of a step-change in global demand.