Copper is a reddish metal known for its high electrical and thermal conductivity, and is essential for the production of electrical and electronic cables, piping systems, industrial equipment, automotive parts, and renewable energy infrastructure. In this blog, we take a closer look at this versatile metal Commodity and its prices.
Refined copper is converted into various semi-finished products such as wire rods, pipes, sheets, strips, plates, rods, rods and profiles. Wire rod is the main product, accounting for 72.5% of refined copper consumption, and is mainly used in the production of wires and cables for power distribution and communication, with construction wire being the most important application. Copper pipes and their alloys have numerous applications, particularly in plumbing and HVACR (heating, ventilation, air conditioning, and refrigeration) systems, and accounted for 12% of refined copper consumption in 2020.
Flat rolled copper products are widely used in electrical applications, construction, automotive and military fields. These are used in the manufacture of doors, hinges, switches, cables, locks and sockets. Total copper consumption includes both refined copper and direct-use scrap used in raw material processing plants.
Leading copper companies in Latin America include Chile’s Codelco, the world’s largest copper producer, as well as Grupo Mexico and Southern Copper Corporation, which have large operations in Mexico and Peru.
Copper demand
World demand for copper is steadily growing, and China has become the largest consumer, accounting for approximately 50% of global demand. It is worth noting that when discussing the consumption of copper in a country, it means the consumption of refined copper for the production of semi-finished products.
For example, if an air conditioner is manufactured in Japan, but the copper tubes included in the product are manufactured in China, the consumption of copper is considered to have occurred in China when processing refined copper into copper tubes.
Inverse correlation between USD and copper price
Copper is traded in USD on international markets, implying that fluctuations in the value of the dollar directly affect copper prices.
When the USD strengthens, copper prices tend to fall. This is because a stronger USD makes copper more expensive for buyers using other currencies, as they need to spend more in their local currency to purchase the same amount of copper. This decrease in global demand puts downward pressure on copper prices.
Conversely, when the USD weakens, copper prices tend to rise. A weaker dollar makes copper cheaper for international buyers, who can acquire a larger volume for the same amount of their local currency. This increase in global demand tends to elevate copper prices.
The graph illustrates the inverse relationship between the USD Index (inverted) and LME 3M copper prices. Typically, as the USD strengthens, copper prices fall, and vice versa. Notable trends include a general decline in copper prices with a strengthening USD up to late 2022, followed by fluctuations. Recently, despite a strong USD, copper prices have surged, driven by speculative activities, deviating from the traditional inverse relationship. This highlights the influence of market speculation on copper prices, beyond currency effects.
Copper hedging
For producers, traders, and large consumers, protection from price fluctuations is critical to maintaining financial and operational stability. Fluctuations in copper prices can impact production costs and profit margins. The most important hedging instruments include futures, options, and swaps. Futures contracts allow you to set the price for buying or selling copper in the future, protecting you from adverse fluctuations. Options provide the right, but not the obligation, to buy or sell copper at a predetermined price, providing flexibility. Swaps allow you to exchange cash flows based on different copper price indexes. For example, mining companies can use futures contracts to set the selling price for future copper production, ensuring stable profits despite market fluctuations.