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The Price of Copper

First, copper is not alone in its rising prices. All commodities have seen rapid and sustained increases in demand as the world economy has grown, and as the third world industrialises. Demand has grown especially fast in developing countries such as China and India, which are developing their electricity, transport and reticulated gas and water infrastructures, all reliant on copper as well as other metals. Increases in metals-based manufacturing in these countries adds to this demand.

So demand is way up, but growth in supply is not following as quickly, despite there being a huge volume of copper resource in the ground, largely because this growth in demand was not predicted by the major copper mining countries in Africa and South America.

A quick look at the copper content of world mine production shows actual production in the past twenty years has increased only 78%. With the length of time it takes to expand existing mines and refiners and to open new facilities, supply has lagged significantly behind demand - the classic outcome of this supply/demand imbalance has been increased prices, the price tripling in the past 18 months alone.

Adding to this supply/demand effect has been the involvement of commodity traders and hedge funds. These traders, with vast amounts of investors funds to manage, have seen the opportunity to profit from the price movements in the commodities markets. The traders buy and sell "positions" in the commodities markets, exploiting the difference between current and future prices. The traders have created artificial "demand" in the commodities markets, pushing prices higher and faster than the real market.

All of these factors have seen the demand for copper rise enormously. In future, expanded mining and refining capacity will correct the supply/demand imbalance. When the commodity markets no longer offer hedge funds profit opportunities, they will abandon them for the next big thing. Prices will relax to more ‘normal’ levels - the only unknown is -when?

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