Friday, April 26, 2013

Copper price trend: Some clouds in the landscape

Copper prices have moved steadily in upward direction in the last 11 years, from U$$/lb 0,60 in the year 2002 to U$$/lb3,15 on April 24th this year. Thus , it has increased by five times since then, and the question now is whether this trend has come to an end. The answer to this question requires to know the variables which push its prices up. A short list about it includes: a.-. Strong demand from China which count for 40% of global refined cooper demand. For instance, in 2012, world usage of refined copper grew by around 3,1% as compared with 2011,mainly due to China demand.- b.- Lack of supply capacity at the beginning of this cycle (2002),compared with copper demand increases, and its slow pace of adjustment upward due to higher production cost. c.- New and different uses of copper. The average car contains 1.5 kilometers (0.9 mile) of copper wire, and the total amount of copper ranges from 20 kilograms (44 pounds) in small cars to 45 kilograms (99 pounds) in luxury and hybrid vehicles.( d.- Dollar depreciation since its peak in 2002.Between 2002-2008 the (inflation adjusted)trade -weighted dollar exchange rate depreciated by 25%(18% against the yuan), at a pace of 3-4% annually. Following a short appreciation period (2008) ,the dollar began to depreciate again between 2009-2012 and fell by 16% through mid 2011(CRS Reports for Congress, ).Despite some forces on the contrary, the dollar value trend,is closer to further depreciation. Of all of these variables, (a) and (d) influence short run and mid term(2014) movements in copper prices. Looking ahead into 2014, because of local government debt adjustment, China is more likely to decrease the pace of its expected economic growth. Some analysts believe China economic growth might decrease to 6,5% next year (, April 22nd) . Without, compensating demand increases from other markets , copper price might move downward the current level. On the other side , Copper Supply grew in 2012 in most of the global producers,(global supply capacity grew from 80% in 2011, to 82% in 2012). Thus, there is already in place a higher copper supply capacity which will push inventories upward ,as demand turn out to be weaker than expected. Therefore, there are strong reasons to believe that Copper Prices might fall down next year further its current level. Is this situation the end of high copper price cycle ?. The cycle has transitory(adjustment in demand) and permanent(innovation flows, substitution alternatives) sources of volatility. In the copper case it has relatively lower transitory persistence partly due to the impact of the short lived shocks on it. Therefore what matter for the cycle fluctuations are the permanent sources.( Energy economics 30 pg606-620).Thus, current copper price changes, seems to be part of normal volatility, with prices adjusting toward new lower levels,but still within the cycle at least for now( more cautious approach is needed to be applied beyond 2014.