Copper: the $10,000 question

In just 12 months the price of copper has rocketed from $3,200 (£1,687) per tonne to around $8,000 per tonne. It is now at the highest price since it was first quoted in its current form in 1870.

Copper, well known for its conductivity, is the world’s third most used metal after iron and aluminium. It has incredible properties that have been exploited in a range of alloys. These have been developed for a wide variety of applications and fabrication processes, used to produce finished goods. Due to such a range of properties, the construction industry is one of the largest consumers of copper products, employing them in components such as pipes, cables and sheet metal cladding.

The global market has seen China overtake the US as the world’s largest copper consumer. In 2004, China was consuming 46% more copper than the US, representing 20% of all demand. And all this despite the Chinese government’s attempts to cap demand, by tightening monetary policy and increasing taxes on exports of refined copper and alloy to 10%, in order to limit exports of energy-intensive products.

Copper demand is closely linked to industrial growth in the economy. In 2004, world copper demand exceeded supply by 760,000 tonnes, rising from a production deficit of 408,000 tonnes in 2003. The International Copper Study Group (ICSG) reported that demand in 2005 was more balanced but also finished the year in deficit. World copper production has risen in 2006 with all major producing countries increasing output. For the first time in several years, it is likely the year will end with the market showing a modest surplus. But, a wave of growth in consumption is forecast for 2007, so production looks set to rise once again to help breach the supply gap.

The graph (see below) highlights the world refined copper stocks against the movement of copper trading prices on the London Metal Exchange (LME), and both the cost of construction of copper pipes and the complete cost of supply and fix. This shows that a rise in the price of the base metal is inevitably followed by an increase in the factory gate price of copper pipe.

The global market has seen China overtake the US as the world’s largest copper consumer in recent years

The cost of copper pipes does not increase by the same level as rises in the commodity itself because the base metal is not the only input cost in the manufacturing process. The price is also affected by the cost of other materials, labour, packaging, the manufacturing process, branding, distribution and other overheads.

Forecasting the future

The unpredictable market is exacerbating the difficulties of accurately forecasting future prices; these have fluctuated recently by as much as 10% over very short periods. In the last three months, copper prices have fallen back by $50 per tonne and, at the time of publication, were trading in the region of $7,300 per tonne. Despite this trend, most industry experts are indicating a price range of $7,000 to $9,000 per tonne. They expect the market to stay volatile and some even suggest that prices may reach $10,000 per tonne by the year-end.

The table (below), shows the movement of copper pipes against retail price and building cost inflation from January 2005 to August 2006. During this period, trading prices on LME have increased by 148% whereas the price of copper pipes leaving the factory gate has risen by almost 90%. We expect the cost of copper products to increase further this year, despite the recent market stabilisation and equilibrium between supply and demand.

As we head towards the conclusion of 2006, prices are forecast to dampen slightly as global supply outpaces demand. But, low inventories could support copper at fairly high levels throughout next year.