The Copper Market
Copper has been essential to mankind for years. Thousands of years ago its malleability made it easy to fashion into tools, weapons, and other decorative/useful instruments. As mankind evolved, so has its use of copper. Now, copper’s applications are more sophisticated. Most of copper’s present day applications capitalize on the red metal’s high thermal and electrical conductivity. Copper is a crucial component of electrical devices, is used in wiring and plumbing and in various building materials. It is also a constituent of various metal alloys.
Copper is the 26th most plentiful element found in the earth’s crust. Even though it is widely available, not all of this copper is accessible, and even less can be accessed economically. Copper is mined either through underground tunnels, or in open pits. While many high value metals such as gold and platinum are mined through tunnels; open pit mining is actually the preferred method of extracting copper. Historically, the most profitable copper mines have been large-scale porphyry deposits, with chalcopyrite mineralization extracted via open-pit mining. While the grade of the ore is not the highest, and the refining costs are more expensive, these deposits tend to have large overall resources, with size trumping grade and refining costs. The largest producing copper mine in the world is the Escondida mine in Chile.
Copper can also be recycled without a loss of quality. An estimated 80% of all copper ever mined is still in use today. The process of recycling copper is roughly the same as is used to extract copper but requires fewer steps. High-purity scrap copper is melted in a furnace and then reduced and cast into billets and ingots; lower-purity scrap is refined by electroplating in a bath of sulfuric acid.
Most of the world’s copper comes from Chile; in 2014 the country produced an estimated 31% of the world’s copper. Chile is followed by China (8.7%), Peru (7.5%), the US (7.3%), and Congo (5.9%).
The major applications of copper are electrical wiring, roofing and plumbing, and industrial machinery. Copper is used mostly as a pure metal, but when greater hardness is required it can be put into an alloy.
Copper remains the preferred electrical conductor in nearly all types of electrical wiring. Overhead electric power transmission lines are the exception, where aluminum is preferred. For a short period from the late 1960s to the late 1970s, copper wiring was replaced by aluminum in many housing construction projects in America. The aluminum wiring was implicated in a number of fires and the industry returned to copper. If something requires electricity or battery power to operate, you can pretty much guarantee that it contains some copper.
Copper’s major use is in buildings, infrastructure and electronic goods. For demand for these items to grow, economic health is important. That is why copper is considered an economically sensitive commodity. In fact, this relationship is so strong that copper has the nickname “Dr. Copper”; as its price can give insight into the health of the global economy.
Generally, rising copper prices suggest strong copper demand and hence a growing global economy, while declining copper prices may indicate sluggish demand and an imminent economic slowdown. Copper’s largest user is China – the country accounts for over 40% of global copper demand; therefore, the health of China’s economy is paramount to copper’s value.
Beyond economic health, there are other factors that drive the price of copper. These include oil prices (specifically WTI), and the value of the US dollar. A 10% rise (fall) in oil prices correlated with a 2.9% rise (fall) in copper prices, with a 0.8% standard deviation and given the other factors. The reasons for this influence included the fact that copper mining is a very energy-intensive process. When the price of oil falls, so does the operating costs of copper miners. When oil climbs it makes it more expensive to mine copper. It is estimated that oil accounts for 7% of the marginal cost of copper production. Another factor is that copper and oil are often held, and traded together in commodity baskets. If the price of one falls, it can cause a sell-off in the other.
Another factor driving the price of copper is the US dollar. This is an inverse relationship. Copper is priced in US dollars; therefore, when the US dollar appreciates it makes it more expensive for international buyers to purchase the commodity, and their demand decreases, resulting in a drop in the price of copper. The most significant currency relationship for copper is the exchange rate between the US dollar and China’s Yuan Renminbi.
Copper prices have ranged from $0.60 per lb. in June 1999 to $3.75 per lb. in May 2006. During the recession copper fell to $2.40 per lb., but the losses were not as steep, nor did they persist for long as China used the fall in copper prices as reason to embark on a strategic stockpiling program. Prices were much lower when the economy was starting to recover, in February 2009 copper fell to $1.51 per lb. The metal recovered, but then collapsed again in 2015 amid indications that China’s economy was faltering. In mid-2016 copper was trading around $2.12 per lb.
Copper futures trade on the London Metal Exchange in the UK, the COMEX in the US and on the Shanghai Futures Exchange in China. Investors have the option to buy futures through either of these exchanges. Physical copper is available for purchase, but it is not popular as a physical investment because it has a relatively low value per volume, therefore storage costs can eat up a significant amount of the potential profits. The LME monitors the amount of copper contained in warehouses, and this data is readily available and an important reading on the state of the copper market. There are also plenty of other copper investment vehicles: ETFs, shares of companies involved in various stages of the copper supply chain, etc.