Copper is one of the oldest metals known to man, as it has been used as a currency for more than 10,000 years. Now, this element is a key base for the industrial and construction sectors, as it makes an appearance in everything from wiring and piping, to heating and cooling equipment. As a financial instrument, copper is a favorite source for active traders looking to make speculative bets on where the commodity is headed. Given the fast-paced nature of copper news and prices, having a firm grasp on underlying price drivers is key to making educated trades. Below, we outline four little known factors driving copper and its respective prices [see also 13 Ways To Invest In Copper].
- Emerging Market Demand: Copper demand has surged in recent years thanks to urbanization in emerging markets such as China and India; as emerging market populations move to cities, the need for new residential housing, transportation infrastructure, and other construction has climbed. China in particular is a major copper buyer, and the health of the Chinese economy is a major factor in determining copper prices. With the health of these popular emerging markets coming into question as of late, copper could be hit especially hard if new construction slows down in behemoths like China and India. While it may seem somewhat removed from the commodity’s price, keeping an eye on developments in these massive markets would be a best practice for anyone with capital allocated to copper.
- Health of Homebuilding Industry: In the U.S., the homebuilding industry is a major buyer of copper, which is used in pipes, wiring, and other components of residential buildings. Copper prices plummeted during the recent recession when homebuilders were battered, and surged during the subsequent “recovery”, which many feel is still a long way from being complete. Similar to news and developments concerning emerging markets, U.S. figures will be equally if not more significant. It should also be noted that U.S. data is far more frequent, with housing and construction data coming every few weeks, commenting on varying corners of the economy [see also Jim Rogers Says: Buy Commodities Now, Or You’ll Hate Yourself Later].
- Supply Disruptions: Because a significant portion of global supplies come from South America, supply disruptions in the region can have a major bearing on global prices. Strikes at major copper producing mines are relatively common, and natural disasters—such as earthquakes or landslides—occur from time to time as well. To give you a better idea for just how significant the Southwestern hemisphere is, Chile and Peru combine to account for nearly 40% of the world’s proven reserves and produce around 42% of the world’s supply in a given year. To be fair, the U.S. is still among the top producers in the world, but its output is not nearly that of its southern neighbors.
- Use of Substitutes: Technological advancements have made possible substitutions of cheaper metals for copper in certain applications. For example, aluminum now substitutes for copper in power cables, electrical equipment, automobile radiators, and cooling and refrigeration tubes, while titanium and steel are used in heat exchangers. To the extent that additional substitutes are developed for roles traditionally performed by copper, there could be downward pressure on prices. Note that copper prices have fully recovered from the recession (save for a slide at the end of 2011), so the prevalence of substitutes may be closer than you think; keep your eyes peeled concerning manufacturing trends and competing metals [see also The Ten Commandments of Commodity Investing].
Disclosure: No positions at time of writing.