Saturday, April 19, 2014

Copper: Crazy Price Swings Continue to Stump Analysts

Follow any strand of copper wire and it will take you to a world of high finance with folks trying to game volatile prices, copper thieves risking electrocution for a couple of pounds of red metal and a whole lot of confusion over why prices are so crazy right now. Many people won’t bend over to pick up a penny in the street. But when the price of copper moves up or down by a penny, it catches the attention of an awful lot of folks in the electrical industry.

That’s because a tiny price change of a few pennies per pound is enough to impact the value of a warehouse loaded with tons of copper wire. And when copper prices drop 10%, as they did earlier this year, it sets off alarm bells in the offices of wire manufacturers.

Any changes in copper pricing have a huge impact on the electrical construction market because building construction accounts for more than 46% of all copper use.

When copper prices bounce around, the ripple effect reaches many key areas of the market. That’s why the industry has such a fixation on the price of copper wire and cable.

For electrical distributors, who make a big chunk of their living from selling copper wire and cable, this may account for up to 15% of all products sold.

The daily price of copper is linked to a fascinating array of global economic and at times political factors that could probably provide the base for a pretty interesting movie or spy novel.

The cast of characters includes Wall Street traders waiting to pounce on inefficiencies in copper pricing that they can make a killing on copper futures; global financiers and government officials calling the shots at mining companies; and even the copper thieves wreaking havoc on construction sites who risk electrocution for the few bucks they might make on stolen copper.

A strike or a flood at a key mine at the very source of the market is enough to directly influence copper pricing on the New York Commodities Exchange (COMEX).

To be sure that spy novel on today’s copper market is completely up-to-date you would need to include the folks who run China’s bonded warehouses in Shanghai, which store thousands of tons of copper. This copper is used as collateral to back financial deals by financiers who have no intent to use the copper in construction projects or in the manufacture of copper-based products.

Just how much copper is in these warehouses is the subject of all sorts of speculation, but it’s enough to swing copper pricing around the globe. It’s estimated that China accounts for 40% of the entire world’s copper demand.

Is it possible to consistently forecast the price of copper if you factored in everything that could potentially impact the price, including mine production, strikes, political unrest in key copper-producing countries and estimated demand from construction.

The simple answer: “No.”

The price of a pound of copper has always been tough to forecast, but when you take the historical perspective, you see that things really started getting crazy around 2004-2005.

The chart shows that from 1989-2004 the price fluctuated in a pretty narrow range from approximately 60 cents/pound to $1.50. Pre-1995, folks would get a little freaked out when prices changed 25 cents to 50 cents in a year.

But starting in 2004-2005, copper smashed the $1.50 barrier and went up in almost a straight line to around $3.50; plummeted to $2.50; ran back up to well over $3/pound; crashed to around $1.50 in the Great Recession; and then headed up to over $3/pound where it stayed for several years before dipping below $3/pound earlier this year.

Many experts say the rapid growth of the Chinese economy as the single largest consumer of copper and the difficulty of getting data on exactly how much copper it uses is the key accelerant sparking the copper market’s volatility.

While economists don’t have a good feel for how the Chinese economy has softened over the past 12 months, they do agree China isn’t buying as much copper for building construction and other production uses. That decrease in demand has apparently led to a market surplus in copper, and lower prices overall.

At the moment there is an over production of copper. The price of copper will be getting less as China’s economy starts to fail, as it is doing now.

The Chinese government’s announcement in late March that it would attempt to stimulate the country’s economy seems to have boosted copper prices back over $3/pound.

It’s this uncertainty rather than any specific price drop that makes contractors hesitant to make a purchase when the price of copper is fluctuating more than usual.

They will say, ‘is this the bottom, or should I hold off and wait to buy? Is it going to go any lower?’

If a project calls for a large amount of copper and you see prices dropping 10% that may influence purchasing decisions, especially if the purchase is not an immediate need.

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Since October 1, 2011