All commodities move in response to supply/demand fundamentals: real and perceived. To analyze any commodity you need to look at what makes up physical vs. investment demand for the metal (in terms of proportions) and what drives each holders. Copper is interesting because physical and investment buyers both account for significant proportions of physical copper demand. It's hard to overstate the importance of copper prices, both to numerous industries as well as the global economy. In the U.S., demand for products made of copper, 60 percent of which is used to make wire, comes primarily from four sectors. One is construction. A second source of copper demand comes from utilities and companies that own and operate the vast transcontinental high-power lines that crisscross the nation and constitute the bulk power grid. A third source of copper demand is manufacturers of electronic products like smart phones and electronic industry. A fourth industry that buys large amounts of copper products is the car and truck industry. The average automobile, for example, contains nearly one mile of copper wiring, while the total weight of copper in cars ranges from 50 pounds for compacts to as much as 100 pounds for luxury and hybrid cars.
The Chinese demand has always been the mover and trend setter for the copper prices. The State Grid Corporation of China (SGCC), which provides power to 80 percent of the world’s second-largest economy aims to boost by 13 percent its annual investment to more than $60 billion. Given that Chinese utilities account for more than 40 percent of Chinese copper demand, that sort of big jump in capital investment should firm up prices.
China is not the only source of expected rising copper demand. The worldwide demand for the red metal has rose throughout 2013. The trends in global refined copper consumption are also progressing to an alarming state. Industrial production is not keeping up with copper consumption and recent indications have pointed to estimates in Chinese consumption to be very conservative. It now appears that in the next 25 years, the world will need to produce as much copper as has been produced in the history of humanity.
India also provides a very compelling case for copper demand and one only has to look as far as their power needs. According to the International Energy Agency, India's power production needs to rise by 15-20% annually and to meet that, India needs to invest $1.25 trillion by 2030 into energy infrastructure. From this new infrastructure, India's annual copper demand is expected to more than double.
There are three major regions that copper investors should focus on in terms of assessing copper demand: the BRIC countries, the U.S. and The Euro Zone. A savvy copper investor will follow the economic developments in those regions for clues into what the future demand for copper looks like.
Supply Growth & Major Hindrances
Strikes, storms and scheduled maintenance of major copper processing facilities are flattening the growth in copper production. The rate at which global copper supplies are growing will peak this year and then begin to slow next year.
Chile -- Output at Codelco’s 300,000 ton per year Chuquicamata smelter was halted for most of December due to a strike.
Philippines -- Glencore’s Pasar smelter in the Philippines remains closed since Typhoon Haiyan slammed into the country on November 7, 2013.
Australia -- BHP Billiton plans a maintenance outage at its Olympic Dam smelter in March.
Indonesia -- Freeport-McMoRan has suspended copper concentrate exports from its huge Grasberg mine in Papua as it fights a sudden 25 per cent export duty that will grow to 60 per cent by 2016 on copper concentrate exports. That led Deutsche Bank to cut its 2014 copper sales estimates by 120 million pounds, assuming a full first-quarter of export disruptions.
Status on global Inventory
In addition to higher demand and production constraints, the global stocks of already-mined copper are tightening. A year ago, copper stocks were about 1.46 million tons. That rose to 1.81 million tons in April of last year and has been falling ever since. By December 2013 global copper stocks had declined to an estimated 1.27 million tons. Further, the metal’s on-warrant inventory has shrunk to its lowest level since 2008. Copper inventories in China, meanwhile, have dropped and stocks at Shanghai Futures Exchange warehouses have also dropped. From where we stand at Metal Miner, whether an uptick in Chinese demand will lift global copper markets remains unclear, but some perceive copper may have hit its floor.
The current prices of copper are driven by excellent fundamentals. Strong demand growth driven by China and global infrastructure/urbanization - underpinned by a wide range of uses. China has little domestic resource and is unable to use its industrial advantages to create supply (unlike aluminum, zinc, coal, iron-ore). Copper industry has failed to deliver sufficient supply growth despite record high prices – prices have had to raise high enough to generate enough scrap to balance the market. Copper demand in China has at least 80% growth left to reach developed world averages and can single handedly support double-digit growth for many years. The other major factor supporting the price is shift in the standard of living in the emerging markets. China is the top consumer of copper in the world, and a major consumer of all commodities. Another reason is the current fundamental which is driving copper growth demand, a trend that extends beyond China and into the emerging markets. Despite the recession, globally right now we are witnessing an unprecedented growth of moving people from rural to urban dwellings. Humans that live in rural settings existence require virtually no copper, but in an urban setting AC’s, electricity, cars etc. – all require copper. Now in countries such as China and India, that have huge populations, this movement means a lot of copper is required.