The Hindu Business Line : Copper — from red to deep red?

The current economic crisis and the resultant slowdown in demand are the primary reasons for the downswing in prices of copper. Copper led the base metals price rally between 2004 and mid-2008. It touched its peak of $8,523 a tonne in the London Metal Exchange (LME) and Rs 388.25 a kg in the Multi Commodities Exchange (MCX) in July. Since then, the prices have been sharply falling. The metal is now trading at $3,024 and Rs 148.45 in the LME and MCX respectively.

Copper futures are widely traded in the LME, New York Mercantile Exchange (NYMEX), Shanghai Futures Exchange (SHFE) and MCX.

Rise and fall of copper

The year 2004 marked the beginning of the surge in prices of the red metal, with the rally triggered by a significant drawdown in stocks and rising demand. Copper inventories in January 2004 stood at 358,075 tonnes in LME. By the end of September 2004, the inventory levels fell by more than 70 per cent to 98,350 tonnes.

The drawdown was the result of a spurt in infrastructure-building and industrial activities across major copper consuming nations such as West Europe, the United States and China.

Copper, being an excellent conductor of electricity, is used abundantly by electrical equipment makers. The second largest copper consumer is the construction industry. The automobiles sector follows.

Once the rally was well under way, speculative trading added to the momentum in prices over the next three years. From the levels in 2004, it had more than tripled to touch the all-time July 2008 high of $8,523. Though speculation was prevalent across all the base metals, it was noted to be the highest in copper. This may explain why copper futures gave the highest returns compared to other metals in this period. Steadily increasing prices also prompted consumers, mostly the Chinese, to accumulate the metal beyond their customary requirements.

Though the US slowdown did lead to tapering demand for copper from end of 2007, the Beijing Olympics kept the demand at fairly healthy levels. China is the largest consumer and is the second largest producer of the metal. The winding down of Chinese growth rates and factory closures led to large stockpiles of copper in the country. The end of the Olympics marked the beginning of the declining trend in copper prices.

Hindalco, Sterlite Industries and Hindustan Copper are the major domestic producers of refined copper. A major share of 10-15 per cent of the total production is consumed by BSNL and MTNL.

The rest of the demand is contributed by the other telecom players, construction companies and the automobile sector. It is only over the last decade that these companies have been able to contribute to the export market. As India has a dearth of copper ore, much of the raw materials for domestic producers are imported, mainly from China and the US. Thus the raw material cost forms a major 50-55 per cent of the production cost.

Raw material costs are influenced by two key factors — the dollar exchange rate as well as treatment and refining costs (TC/RC). Copper producers have posted good profit numbers in recent quarters. The effect of copper ore price hike and lower realisations is likely to be reflected in the forthcoming quarters.

Outlook

Prices of base metals such as aluminium and zinc have fallen by more than 55 per cent in the LME and MCX from their July highs, while copper has corrected by over 60 per cent. Though copper has seen a harsher price correction, further downside in prices cannot be ruled out as spending on infrastructural projects has slowed down. That copper inventories at the LME are back at 291,200 tonnes — 2004 levels — is another bearish signal on demand and prices.

Aluminium, which is currently trading at $1,445 a tonne in LME, is a close substitute for copper in the automobiles industry. If the price of aluminium further falls, it is likely to be of more threat to the red metal.

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