Copper is an important commodity and the price at which it trades is affected by many variables, the most obvious being supply and demand. Copper is widely used in construction and engineering and electrical applications. Economic growth in Asia has seen demand for copper rise in recent years with building accounting for approximately half of its total use. China accounts for approximately 40% of the global demand for copper.
Copper is an excellent conductor of electrical current and is also a good thermal conductor. It has many more properties, however, such as it is not corrosive, it does not carry bacteria, it is tough, non-magnetic and is recyclable. It is, therefore an excellent material for many applications throughout modern life.
Copper also has a long history of being used as a currency. When gold sovereigns were minted they were not pure gold but eleven-twelves pure or 22 carat. The rest was copper or silver. Before the First World War silver was 99.25% of a coin and the rest was copper. As the value of the precious metal rose new coins were minted with less silver and more copper. Later, the cupro-nickel coins were introduced with 75% copper and 25% nickel. The current coins contain 95.5% copper 3% tin and 1.5% zinc and the old threepenny pieces (remember those?) were brass or 79% copper, 20% zinc and 1% tin.
Every year thousands of tons of copper are used for the manufacture of coins with the Royal mint minting 700 million bronze and cupro-nickel coins recently representing 7,000 tons of metal. Supplies of gold and silver are more limited than those of copper.
Copper is widely used in industry, in the copper wires we use to link our telephones and data links and around the house, office and factory. Currently a 0.999% pure copper ingot sells for £26 per kilo so the more we switch away from using copper by substituting fibre and wireless the more copper we will have available for use in coins and salvaging these old installations of copper could become quite lucrative.
The Chinese, too, have a history of using metals such as copper, gold, lead and silver as coins. These quickly replaced shells which, in its turn had replaced animals and textiles as a means of exchange because they could be stored and would give a reference to the wealth of the holder that would last.
It is not surprising then that the Chinese have turned to their vast stores of copper built up during the recent years of rapid development and expansion, as collateral to support the loans that they require to fund development in the new semi capitalistic state of China.
As a result, copper has been in huge demand in recent years causing the Chinese to seek out huge mines that they could acquire or take a major interest in such as the Las Bambas copper mine in Peru that Glencore Xstrata sold to them. It has also meant that other independent miners have re-opened or developed new and existing mines in order to meet the huge demand that, what is the world’s second largest economy, is creating. The slowdown in the growth rate of the Chinese economy has coincided with this growth in supply and resulted in a weaker price for copper. This will, eventually, lead to mines that are expensive to operate being closed or mothballed and a price recovery. This will take time and could be sped up if China and the global economy recover quickly but, in the meantime the price has become weaker.
The price of copper has this week fallen to its lowest level in six weeks amid concerns in China. This is partly due to the slowdown in their housing but also due to concerns over the use of copper as collateral in the country. In March this year, a Chinese solar company caused the first ripples of concern over this practice. The company defaulted on a $14.7 million interest payment on its bonds. The company had been unable to get a conventional bank loan and in China many such businesses buy copper on the open market, store it in warehouses and then use the metal as collateral for cash from other lenders. The fall in the price of copper meant that the company could not meet its obligations.
Further concerns have also risen over the use of copper as collateral as there have been allegations that the stockpiles have been used to secure loans from several lenders at the same time. This could cause losses running into hundreds of millions of dollars should the house of cards collapse as lenders realise that they are holding liens on the same collateral. Stockpiles of copper at the port of Qingdao are currently being investigated on these fears amid concerns that a trader there has defrauded several Western banks. This has raised further worries that traders could begin selling the copper back into the market in order to pay off the loans that are being scrutinised.
It has been estimated that at the end of May approximately 60%, or 100,000 tonnes of the copper inventories in the global supply of LME copper was stockpiled in Qingdao according to Macquarie Although stock piles in other warehouses in China are much larger. Apparently there are also 800,000 tons of copper stock piled in Shanghai bonded warehouses. This underlines the vulnerability of the price should those stock piles be sold into the market in order to meet the loans if called in.
Copper is mined in several continents with 90% of production coming from America, Europe and Asia. The price of copper will be affected by macroeconomics and socio-political events. Often the countries where it is mined are susceptible to political unrest. It is usually in strong demand when the construction industry is at its highs. Copper traders try to buy the metal on the London Metal Exchange (LME) when it is cheap and then sell it in China. Any gains in the value of the Yuan will lower the cost of importing copper into China. There are also hedge funds which focus on commodities and their view of the supply and demand figures for the metal can also affect the price of copper.
The International Copper Study Group has predicted that there will be a surplus of 405,000 tons of copper this year due to oversupply and the slowdown in the Far East.
The result of this fluctuation in demand and supply is that the price of copper cannot be relied on as a means of supporting a currency or the value of stockpiles of copper that are used as collateral for the support of loans.
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