Copper: One of the world's oldest commodities
- Monday, June 01 - 2009 at 14:38
Recently I wrote a column about copper and the developments in its pricing. In this column I would like to give some background information about this interesting metal.
Copper is one of the world's oldest commodities, and belongs to the group of industrial metals, which includes iron, aluminium (alloy), lead and zinc.
Copper is used in a wide variety of applications.
The largest use of copper is, due to its electrical conductivity, in the electronic business. It is for instance used for wiring and electrical parts in electronic and telecommunications applications (including radios and televisions).
Because of its resistance to corrosion, it is also used in plumbing. Copper is therefore also used extensively in the housing and automotive industries.
Price developments of industrial metals might be a good indicator which direction the global economy is heading toward. If prices are falling, true demand is diminishing which means that the economy is contracting and vice versa. It is important to learn the price-determinants in order to obtain a good judgment of price developments.
The US dollar is one of the driving factors of copper prices: A weakening dollar will have a positive influence on copper prices (as with other dollar denominated commodities). Similarly, a weakening dollar means that it will be cheaper for importing countries to buy copper.
On the demand side, market participants are closely watching China as the world's largest copper consumer. It is no surprise that analysts and traders are monitoring the effects of the Chinese government's nearly $600bn economic stimulus.
Copper futures are traded at the London Metal Exchange (LME) and the Commodity Exchange (Comex) in the US, with differences in contract specifications. At the LME, grade A copper futures are being traded at a lot size of 25 tonnes and are quoted in US dollars per tonne.
At the Comex, the futures contract is based on 25,000 pounds of electrolytic cathodes. Because in general, the quality of copper cathodes deliverable on the LME contract is slightly higher than those traded at the Comex, LME copper contracts are traded at a slight premium to Comex ones. The future price I discussed in my column , refers to high grade copper futures traded at the Comex.
In the beginning of 2009, (high grade) copper dropped from $4.20 to a low of $1.40 (per pound). The 50% price increase since January is a strong recovery and very promising. However, it is far too early to conclude that the recession is over.
In conjunction with price developments in other markets like the Baltic Dry Index, stock markets and oil markets, sooner or later we get better clues as to whether or not we are entering a new economic phase. The current developments on the various markets are promising, however the recovery has to be sustainable.
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