InvestorQ : Why have copper prices fallen so sharply and what it means for copper companies?
Anjana Aiyar made post

Why have copper prices fallen so sharply and what it means for copper companies?

Khushi Patel answered.
2 months ago

Copper has fallen sharply in the recent past and is trading at a 15-month low on the London Metals Exchange (LME). Interestingly, the empirical evidence is that the global economy moves in tandem with copper prices and these copper prices can be used to predict the turning points in global economy. That is not great news for the world economy. The last time it hit such low levels was during the peak of the COVID pandemic, when global demand was seeing a surprising shrinkage.

The reasons for this correlation are not far to seek. Copper is used at homes, factories, in electronics, power generation and transmission etc. That is what makes it one of the key indicators of economic growth. While rising copper prices reflects robust copper demand and growing economic activity, fall in copper prices indicates sluggish demand and economic slowdown. This will only get confirmed in the next few months. LME copper prices have fallen 21% from $10,845/tonne in March 2022 to a level of $8,600/tonne.

But, why have copper prices fallen? There are demand concerns arising out of resurgence of COVID in China. At the same time, the fall in copper prices is also due to the rising interest rates globally. China remains the key reason as it accounts for 50% of the world copper consumption. China’s copper demand has grown at the lowest level in over 30 years. In addition, even the dollar strength is capping gains for copper. Since most of the commodity prices are denominated in dollars, a strong dollar is not great news for commodities.

Two of the major copper producers; Chile and Peru, which represent 40% of the global supply, have been witnessing major supply disturbances in 2022. Despite these factors, the first four months of 2022 saw preliminary surplus of 95,000 tonne. As per latest reports the global refined copper market is likely to see a surplus of 142,000 tonne in 2022 and 352,000 tonne in 2023. That is likely to keep the price of copper under a lot of pressure. That is the reason, copper prices have fallen nearly 25% from it peak levels.

This is likely to wipe away some of the gains of copper in the last one year, but that trend has already been seen.