What's really driving the price of copper?

Australia's major copper mining company, Oxiana explains what really influences copper pricing and what to expect in the future, dispelling many of the myths and speculation rife in the electrical industry.

The electrical industry has been frustrated and angered by the 'rollercoaster' price of copper cable in recent times to the point of suspicion and accusations of rip-offs at every point of transaction — from manufacturer to wholesaler to contractor to client. Questions about why it's happening and where it's going in the future have been met with very few satisfactory answers.

Enough of the speculation, misinformation and half-truths about copper prices. I recently spoke with Oxiana general manager marketing Russell Griffin to get some real answers on what influences copper prices and what to expect in the future.

I assumed copper prices increased because demand for copper had surged in China and India as they invested billions into infrastructure, but the world's copper mines didn't have the capacity to satisfy it.

Is that what's driving copper prices up?

Griffin: Asia currently consumes 50% of the world's copper production, so it is a major factor, but not the only driver. It can't be viewed in isolation from the many other factors affecting the LME copper price.

What's LME?

Griffin: LME is the London Metal Exchange, the world's leading commodity, futures and options exchange for non-ferrous metals. Their copper price index sets the benchmark for pricing and hedging for most of the world's copper transactions.

So what's the most significant contributor to copper price volatility?

Griffin: The volatility can be attributed to the actions of various fund managers. Institutional investors who invest our superannuation dollars constantly monitor futures and hedge markets, looking for places to invest our money for solid returns. For copper, they look at the forecast supply and demand figures, analysing the current and anticipated demand for copper, which determines their interest in futures markets ie, the potential future value of copper. Of course there has to be a link between the physical market — where actual product is bought and sold — and the anticipated demand in the future and the market's ability to satisfy that demand, in anticipation that the price will go up and generate a reasonable return on the invested super funds.

Is that the key driver then?

Griffin: Trading in futures funds puts the spikes — the short term highs and lows — in the price of copper, while broader issues like global demand and the market's ability to satisfy that demand contributes to the long term overall price. If you charted the LME price over the past ten years, you could see spikes amongst an upward trend.

Copper has risen sharply in the last few years. Is that unusual, or is copper pricing normally volatile?

Griffin: Copper has been stable for many years. In fact, from the late 90s to 2003, the LME copper price sat below US$2000 per tonne. It climbed sharply in 2004, peaking mid-2006 at almost $9000 a tonne. More recently it's trading between $5000 and $7000. So it's been quite volatile over the past three years. It's worth noting that the average price between 1998 and 2003 was only $1650 a tonne, and because of such a low price for so long a period, many mining companies either collapsed or shut down their copper operations. Basically the price was so low that, in many cases, it was costing them more to dig it out of the ground and process it than what they could sell it for.

What are the costs to mine and produce copper?

Griffin: There are significant capital costs to extract ore and process copper to produce copper cathodes, as well as labour and consumables for these processes. While these don't influence the LME price, they have a big impact on the viability of the mine as an ongoing business concern. Before extracting any ore, every mine has to move huge amounts of soil and rock before they get to it. And even before that, vast sums of money are spent on exploration, often with no return, where sites are found to be commercially unviable to mine. Ore in the ground typically yields around 1-2% copper. So having to mine 100 tonnes of rock and then process it to extract a tonne of copper gives you some idea of the effort and investment that goes into producing copper.

How does that influence investor attitude?

Griffin: With all that investment and risk on top of an already low index, investors back in the 90s saw little value in copper, so mining companies reduced their investment in exploration and expansion. The surge in demand in recent times comes off a platform of low investment in supply due to historically low returns. There was little stock and no new copper sources in the pipeline to service the long-term demand, all of which is compounded by the significant time lag in bringing copper to market from a newly discovered site. Investors quickly realised there was a solid, long-term growth prospect in the future value of copper as a commodity.

So what's the future look like for copper pricing?

Griffin: With little exploration in the 90s, the yield from existing copper mines is diminishing and will continue to do so for at least the next decade. Expansion at these existing mines will only yield a small increase. Given the lag in producing copper from new sites, we expect only marginal increases in copper output over the next three to five years. In the meantime, demand is expected to continue to grow at a steady rate of around 4% p.a. for at least the next decade.

So how will we satisfy this increasing gap between supply and demand?

Griffin: Some demand will be met by alternatives to copper, but that's limited. Improved recycling of existing copper will also help, but the majority of supply will need to come from significant investment by mining companies around the world.

How would you summarise the economic climate that will influence the future price of copper?

Griffin: Demand will be strong due to its diverse uses, the continuing strength of the infotech revolution and major electrification projects around the world, led mainly by China. Supply will be low due to fewer discoveries, lower-grade ores, higher costs for exploration, mining and production and more difficult domains to extract the ore from. Copper price will be buoyant in the short term and remain strong in the long term.

Just the facts please

So there you have it — what's really driving the price of copper. It's not suppliers ripping you off, corporate market manipulation, or profiteering on the back of the Iraq war. What you heard from the market was probably misinformed attempts to explain an enormously complex issue that is essentially fuelled by stock market sentiment. Right now, copper is and will continue to be very popular with investors. The good news is that your superannuation is growing nicely thanks to the price of copper.