Copper's Vertical AscentBy Alan Beattie, Financial Times
https://www.gulfnews.com/business/Business_Feature/10042714.html
The near-vertical take-off of the copper price this year has created among investors an unstable mix of greed, speculation and conspiracy theory worthy of the bullion market. Among businesses that use the commodity has grown a fear that, even with the speculative froth blown off, copper prices will continue to be propped up by real concerns about future supply.
Global inventories have sunk to critically low levels, able to satisfy only a few days' worth of world consumption.
The red metal soared to over $8,000 a tonne as the Organisation for Economic Cooperation and Development said annual growth in China was likely to remain close to 10 per cent for the next two years.
It is not surprising that copper prices should rise at a time of rapid industrialisation in Asia and elsewhere.
Though optic fibre has replaced it as the telecommunications medium of choice, copper is still widely used in electrical wiring and construction. There are substitutes for some of its uses, such as steel that can be used in construction, but for many applications it is irreplaceable.
It has been cited by several manufacturing companies, particularly in Asia, as a substantial constraint on profitability.
The speed of the price increase almost doubling in 2006 has taken even industry experts by surprise.Anglo American, the London-based mining and natural resources company with decades of experience, sold up and quit its operations in copper-rich Zambia four years ago.
At the time the company, which had bought a controlling interest when a state-owned copper operation was privatised, said it could not continue production with world prices so low and Zambian production costs so high.
Vedanta, an India-focused, London-listed company that took over the mines, has expanded production after soaring prices pushed the operation rapidly into profit. Though industrial demand for copper has risen strongly in recent years, it seems highly unlikely this alone could have produced the recent exponential rise in the price.
Though demand for copper seems to have moderated recently quite likely in reaction to the high prices of last year existing stocks remain low, having been run down to satiate rising demand. A commodity with few substitutes, small stocks and limited capacity to ramp up production will always be vulnerable to fears of sudden interruption in supply.
The ability of exporters such as Chile, the world's largest, to increase production has undershot industry forecasts. Part of the shortfall reflects unexpected technical problems, but part is the industry's traditional struggle with its workforce when there are big profits to be made. Miners organised into powerful trade unions know from long experience exactly when to grab a bigger piece of the pie by threatening a shutdown in production.
Miners across the world have come out into open confrontation with management over pay particularly in Chile, which has a long tradition of well-organised militancy.
Managers at Escondida, the world's largest copper mine, are braced for a huge pay demand when existing contracts expire in August.
The union has demanded details of company costs and profits over the past three years to help them claim what they regard as a fair share of the spoils.
Repeated threats to supply, which can take on a dynamic of their own once started, will ensure that anxiety in the copper markets remains high. Investors, mining companies and mineworkers can generate big returns if they make the right judgments. That does not bode well for copper traders who want a return to the quiet life.