The price of copper is up nearly 40% since December, even though the economy is sliding into recession. What's going on?
The price of copper is up nearly 40% since December, even while the world is slipping deeper into recession. So what's driving the price?
Copper is often seen as a bellwether for the economy. Due to its electrical and thermal properties, and the fact that it is easily worked, it's used in many applications, the main ones being electrical cables and wiring, and pipes for plumbing. As the copper has to be purchased before the houses are sold and cars are made, many consider the demand for copper to be a leading indicator of economic recovery.
The slowdown in the economy saw the price of copper fall by two-thirds from its peak last summer. From a shortage situation, during which people were killed trying to steal live electricity cables, supply is now estimated to exceed demand by about 2%.
The China effect
But it all depends on China, which is the single biggest user of copper, accounting for about a quarter of world demand. Rio Tinto (LSE: RIO) reckons that demand for copper grows roughly in line with, or slightly faster than, global economic growth, but China's growth of 13% in 2007 caused its consumption of copper to grow by 35%, due to the demand for vehicles and properly serviced buildings.
So the rise in the price might seem odd at a time when economies are contracting, and Chinese growth is slowing. Part of the reason seems to be the rumour of increased purchasing from China as a result of their economic stimulus program, and also in an attempt to build up their stocks when prices were low. It's not really clear what the Chinese authorities are doing, but according to some sources it would be enough to mop up all of that 2% oversupply and return us to a shortage.
More recently, some unexpectedly good economic data from the US -- improvements in durable goods orders, retail sales, new home purchases and residential construction -- suggest that we may be seeing some recovery in the West.
Looking forward
Long term, I'm bullish about copper, as vast areas of the world develop a taste for electricity, mechanised transport, and indoor plumbing; in the short term, however, prices will be driven more by speculation about the future supply and demand than by the current situation. Counter-cyclical inventory building in China doesn't really signal a return to shortages if the underlying demand fails to materialise.
You can take long or short positions on the DJ-AIG Copper Sub-Index using exchange traded commodities (ETCs) such as ETFS Copper (LSE: COPA), ETFS Leveraged Copper (LSE: LCOP), and ETFS Short Copper (LSE: SCOP), but make sure you understand the risks of these products before buying -- these two articles should help you.
Alternatively, many of the big mining companies are exposed to the copper price:
You can read more about these and other mining companies on our Mining Sector discussion board.
More from Padraig O'Hannelly:
