Navigating the Labyrinth

Forecasting prices is a daunting task, but an even more formidable exercise is analyzing all of the various factors of supply and demand. The situation has been exacerbated in recent decades by the emergence of the world market with all its intertwining interconnections that create a mind-boggling tangle. Prices of crude oil and metals skyrocketed in the beginning of this new millennium, but they also saw some major corrections following each new high. Analysis of supply and demand alone is not as effective as technical levels in explaining the countertrends within the major uptrends in those markets.


Copper and the Mobius Strip of Supply and Demand
First, consider one particular global commodity market: that mainstay of the Bronze Age, copper. Increased Chinese demand for industrial metals, which was fueled by accelerated building of factories to respond to the global hunger for cheap goods, caused copper futures prices to quintuple from 2002 to 2007, as shown below. That’s the simple explanation. When discussing the bull market on copper on a fundamental level, there is no definite end to the factors that influence its market value. Chasing down a solid point of origin for why copper has been such a hot commodity for the past decade is like peeling away the layers of an onion only to find another whole onion at the core. One industry leads to another in an unending trail.

Copper Futures, 2002–2007
Source: eSignal

Demand
China is the world’s largest consumer of copper, using 3.72 million tons in 2006. AME Mineral Economics research forecasts China’s portion of world consumption for 2008 to be 22.8 percent, all of Western Europe’s portion to be 21.7 percent, and the U.S. portion to be 13.4 percent. There are many reasons for China’s hefty demand for the nonferrous metal. Most household appliances today carry the ubiquitous “Made in China” label. The quest for understanding the growth in the copper market could almost end at this ever-familiar sticker, which is seen on just about anything that either plugs into an electrical socket or runs on batteries. The real focus, however, goes beyond China’s exports to its own national consumption of copper. Get the book to read more.

Supply
Currently, China is the world’s largest copper-consuming country, making it the heavyweight on the supply-and-demand teeter-totter. In 2002, China surpassed the United States in consumption, and based on graphs configured by the AME Mineral Economics firm, projections show that in 2008 China will consume 22.8 percent of the world’s copper supply—1.1 percent more than Western Europe and 9.4 percent more than the United States.

Wading through this rocky sea of speculations, conjecture, and contradicting figures, it is unclear whether the demand for copper has entirely tipped the teeter-totter to the demand side. What is certain, however, is that the world’s copper supply is taking a massive hit from China, and suppliers are reacting.

Chris Curfman, president of the global mining division at Peoria, Illinois-based Caterpillar Inc., has noted that the growth in the demand for copper is “testing the limits of a lot of capabilities” of suppliers. With China’s demand exhausting older and, at one time, plentiful mines, mining companies such as BHP Billiton are spending more on exploration and are pushing away from Chile (the world’s largest copper producer) into riskier territory for new copper prospects. Moving into harsher environments of Africa and politically unstable parts of Asia and Mongolia will mean more frequent disruptions in production in the mines and will effectively raise the price of copper, which already is continually rising due to diminishing supplies. Get the book to read more.

The Unique Nature of the Copper Market
The unique aspect of the nonprecious metal commodities is this: unlike many other commodities such as corn, wheat, cotton, and the like, it takes nonprecious metals to mine nonprecious metals. The clue to this phenomenon in the preceding paragraph is that both Antofagasta and Rio Tinto expressed concerns over shortages surrounding equipment availability, power and water supply, truck tires, and explosives—all of which use copper either as a component or an adjunct to processing. Like many other nonferrous metals mined, copper, in part, is a self-generating commodity. Get the book to read more.

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Navigating the Labyrinth