Copper: A Crucial Commodity to Monitor in 2022

Copper: A Crucial Commodity to Monitor in 2022

Copper has played a crucial part in technology for millennia and continues to do so during the current industrial boom. Due to its numerous applications, it is a desirable commodity for trading.

Copper, a barometer of the global economy

Copper is one of the most valuable commodities on the international financial market. This is because it is utilized by some of the most significant economic sectors. Due to its high conductivity, it is widely employed in the electrical industry and in the primary power grid of the majority of countries.

In addition, the change from gasoline-powered to electric vehicles in recent years has increased the demand for copper. This is because the average electric vehicle has more copper than the average gasoline vehicle.

Consequently, financial actors consider copper a barometer of the global economy's health. Moreover, the price tends to increase when the global economy expands. It also tends to decline when global economic shocks occur. When the Covid-19 pandemic struck China and then spread to the rest of the world, spot copper prices dropped by 26%, from $2.86 per pound in mid-January 2020 to $2.12 per pound in mid-March.

What influences the copper price?

It is essential to comprehend the factors that can affect the price of copper to anticipate potential market changes and better prepare for trades. Copper's price can be impacted by various factors, but the primary drivers of copper pricing are demand and supply.

Global economic expansion

Copper's price is frequently cited as an indicator of the global economy's health; If the global economy is enjoying continued expansion, the price of copper is often high due to increased industrial demand. In contrast, the price of copper is low during a recession due to decreased infrastructure spending.

Because of this, copper price speculation is a common approach to convey a bullish or bearish perspective on global growth and gross domestic product (GDP).

Emerging Markets

Due to the demand for additional housing and transportation infrastructure to support their economies' expansion, rapidly growing nations are among the most prominent copper market participants.

In particular, China's robust economic expansion and proliferation of infrastructure projects substantially impact copper demand. China accounts for more than 50% of the current world copper demand.

1978 marked the commencement of China's economic reforms and opening-up policies, which gradually laid the path for China's meteoric economic growth over the following four decades. This resulted in tremendous growth in copper consumption, from 1.85 million tons in 2000 to 12 million tons in 2019, with the majority increasing due to massive infrastructural improvements.

Supply Disturbances

As supply chains are disrupted by political and environmental difficulties in copper-producing nations, the market price might be affected.

As a significant producer, Bolivia has a substantial impact on copper prices. In 2007, when the mining industry was nationalized, and the supply chain was interrupted, this became clear. As a result, the price of copper soared, as supply could no longer satisfy demand.

In a more recent context, the refined copper market had a surplus of 142,000 tons in 2020, but experts project that shortfall will grow to 219,000 tons by 2025. This scarcity has already begun to have implications, which will become increasingly severe as it continues.

Inflation

Historically, base metals such as copper have functioned as a hedge against inflation, partly due to how costs may be transmitted through the supply chain to spot prices. Since 1992, additional research indicates that copper prices have typically increased 18% for every 1% yearly increase in consumer prices.

Figure 1: Inflation hedge per major components (1992-2016). Source: Bloomberg

Alternative Metals

Substitution is the activity of seeking cheaper alternatives as to the price of an asset rises. It occurs in most commodities markets. This may exert negative pressure on copper prices or, at the very least, hinder the market from growing.

As copper rises, cheaper metals such as aluminum are substituted for it in electrical cables and equipment. Other base metals, such as nickel, lead, and iron, are utilized as copper alternatives in some industries.

How investors are trading copper

Multiple methods exist for traders and investors to obtain exposure to the copper price. For instance, investors may purchase copper bullion and coins from metal exchanges, trade copper futures, or invest in equities or ETFs.

Copper futures, as a reminder, are contracts that draw their price from the underlying commodity and constitute an agreement to exchange a quantity of copper at a predetermined price on a specified date. Copper and High-Grade Copper are the two types of copper futures markets available for trading with IG.

  1. High-Grade copper is the copper futures market of the New York Mercantile Exchange's COMEX division. Copper can also be traded on a spot basis at the current market price, although futures contracts priced in cents per pound are more common.
  2. LME copper, originating from the London Metal Exchange (LME) copper futures market, can also be traded in spot form, but futures contracts are the norm. Futures contracts on the London Metal Exchange are established three months in advance, quoted in dollars, and traded in 25-ton lots.

Copper is traded on other commodity markets besides the LME and the COMEX. As China is the largest user of refined copper, accounting for approximately 54% of global consumption, the Shanghai Metal Exchange is becoming increasingly significant.

Copper in the Future

Copper prices are positively correlated with inflation, and historically, the commodity has performed well during inflationary periods. In addition, China's aggressive expansion ambitions are driving an increase in copper consumption, and the country's economic expansion is boosting the copper market. Lastly, clean technology and renewable energy initiatives and infrastructure development present enormous growth potential for copper, as substantial quantities of the latter are required to rebuild modern infrastructure and energy systems.

In conclusion, despite a variety of challenges, such as growing material costs, supply chain concerns, and barriers to sustainable production, the factors in favor of copper demand growth should continue to increase over the long run.

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