What determines the prices of Copper?

There exists a doctor in the world of commodities who, in most of the cases, has the ability to forecast the global economic health. The commodity in question here is Copper, which is also known by the moniker ‘Dr. Copper’. In this article, we will find out the reason behind this moniker and the factors which determine the price of copper.

Impact of economic developments on copper prices

Let’s start by understanding the reasoning behind the moniker Dr. Copper. It has been observed that global economic developments tend to be strongly correlated with the prices of copper. This is because copper, which is a non-precious metal and is also the best conductor of electricity, has widespread applications in almost each and every sector of the economy, ranging from electronics, construction, industrial machinery to power generation and transmission. Due to copper’s omnipresence in our world, this base metal is viewed as a reliable indicator of the global economic health, as implied by the moniker Dr. Copper. Rising market prices of copper reflect strong economic health and declining market prices indicate the opposite. However, Dr. Copper shouldn’t be the only indicator of global economic health one considers while making forecasts.

Impact of supply on copper prices

Let’s look at how the supply of copper impacts the prices of it. The production of copper ore is majorly concentrated in South America, with Chile accounting for almost one-fourth of the global supply of mined copper. Various factors like the supply levels of copper ore, the quality of the ores and the costs of extracting them, which we will discuss shortly, may also influence the price of copper. Commodity specific events like construction of new production facilities or unforeseen events like supply disruptions, natural disasters, worker strikes, and geopolitical instability may also impact copper prices.

Impact of exchange rates on copper prices

Let’s now understand the impact of the USD-INR exchange rates on the prices of copper. Just like every other internationally traded commodity, copper is priced in US dollars and the Indian prices of copper reflect the prevailing international spot market. Let’s understand this relationship of exchange rates with prices of copper through an example. Assume that there is a decrease in the value of the US dollar as compared to a copper buyer’s currency, which means that the buyer will have to spend less of their own currency to buy a given amount of copper. Subsequently, as copper now becomes less expensive, demand for it rises which results in an increase in its prices and vice versa.

Along with this, weakening prices of the US dollar may also disincentivize producers to increase their output levels. Let’s understand this through another example. Assume that the US dollar depreciates against the Chilean Peso, the currency of the country Chile, which also happens to be one of the largest global producers of copper. This depreciation of the US dollar against the Chilean Peso may reduce the profit margins for a copper miner in Chile, and since all the revenue which the miner receives will be in US dollars, it will now be worth less Pesos. Leadingly, this prospect of lower profit margins may compel copper suppliers to reduce production levels.

Impact of oil prices on copper

Let’s now understand how oil prices can impact the price of copper. We all know that one can’t use copper in its raw form. It needs to go through refinement and a lot of other processes before it becomes fit for consumption by factories and workshops. It turns out that these refinement processes are quite energy intensive, with energy costs taking up almost 30% of the total cost of extracting the ore, and the processes of smelting and refining can bump this up to 50% of the total cost. So whenever there would be a rise in oil prices, an increase in energy costs will also be observed which may also end up increasing the prices of copper.

Impact of trade policies on copper prices

Let’s now understand how trade policies set up by governments end up influencing the prices of copper. Governments can either implement or suspend taxes with the goal of influencing the supply of copper by either restricting or encouraging the flow of copper in the market. This then ends up influencing the price of copper by either increasing or decreasing it based on the action taken by the government.

Impact of stockpiles on copper prices

Let’s now look at how copper stockpiles also impact copper prices. According to copper producers, keeping an eye on copper inventory levels can give some clue about what the fair price of copper is. Theoretically, rising levels of copper stockpiles are indicative of a weak market, as supply exceeds demand, which results in stockpiling. Generally, copper prices and inventory levels move in opposite directions. So, when copper producers find the present market price of copper to be not so favourable and think that they can get a better price if they wait for a while, they may put their production into warehouse storage and then wait for better times in the market. When they find the prices of copper rising to levels deemed favourable by the producers, they may start rolling back the inventory back into the market, thereby increasing the supply and consequently impacting the price of copper as well.

On top of all these factors, speculatory activities done on the part of speculators like hedge funds which focus on commodity markets can also influence the prices of copper, at least in the short-term. As an example, some Chinese hedge funds in the past have taken advantage of poor liquidity and uncertainty in the market to move the prices of copper by a significant margin.

Also Read: Understanding Commodity Indices

Conclusion

To conclude, we can say that there are numerous factors at play when it comes to determining the prices of copper. The final price of copper which one may see in the commodity markets is almost always a result of a combination of the factors we discussed and some others as well, depending upon the general situation of the global markets.

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a SEBI registered with SEBI as a Research Analyst vide registration no. INH000000990. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.