Copper Trends, Trading and Market Positions. Copper is an excellent conductor of heat and electricity, making it invaluable for use in the

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1 Anthony Lazaruk Copper Trends, Trading and Market Positions Copper is an excellent conductor of heat and electricity, making it invaluable for use in the construction and electrical goods industries. In the construction industry, it is used in the form of cables, wiring, plumbing, heating and ventilation and other building materials. It is also used extensively in the wiring and circuit boards of phones, computers and other electrical goods. Copper has been a traded commodity on the London Metals Exchange (LME) since Copper, in its natural mineral form, goes through a series of production transformations before it reaches the end user. 2 From the mines to the end users, copper undergoes a value-added supply chain from extraction, to smelting, to the production of semi-finished products (tubes, rods, rolled products), to the manufacturing and assembly of electronics and other products sold to industry and retail consumers. Although found in abundance and widely extracted as well as recycled, the copper value chain is quite capital intensive, making the market susceptible to supply-side constraints and, thereby, volatile price fluctuations. 3 1 London Metal Exchange, Copper Production and Consumption. Retrieved from: 2 KME Group, The Copper Supply Chain and KME s Role. Retrieved from: 3 Chicago Mercantile Exchange (CME Group), Copper Futures and Options. Retrieved from:

2 Historical Copper Prices and Price Chart USD/tonne Jan 1989 to September Current Trends As can be seen from the chart above, copper prices sank substantially during the global financial crisis period. But they have rebounded quite strongly, in large part due to demand from China. China s demand for copper had an 80% year-on-year increase in the first half of A recent driver of copper demand is due to its antimicrobial properties. Use of 4 InfoMine, Historical Copper Prices and Price Chart, Retrieved from: 5 U.S. Geological Survey, Copper, Mineral Commodity Summaries, 2013, p. 49. Retrieved from:

3 copper alloys in the health-care environment has shown to be effective against bacteria that cause hospital infections such as MRSA. 6 Copper Production by Country Chile is by far the world s largest producer, producing 5.37 million tonnes in 2012 with 190 million tonnes in reserves. Nearby Peru is also a large producer. Peru produced 1.24 million tonnes in 2012 and has 76 million tonnes in reserves. Zambia and the DRC are also significant producers, each with 20 million tonnes in reserves, with 2012 mine production at 675 thousand tonnes and 580 thousand tonnes respectively. 7 Copper Producers Codelco is the state-owned Chilean mining group and is the world s single largest copper producer, controlling about 20 percent of total global reserves. Freeport-McMoRan is a Phoenix, Arizona-based company and is the world s largest publicly traded copper producer ($31.71/share) 8. Glencore International is a Swiss company that produced about 542,000 metric tons of copper in Glencore has mines in Canada, Australia, and South America, and the red metal produced in those regions are smelted and refined in Western Europe, China, Southeast Asia, Japan, and the United States. 9 In Zambia, two companies produce copper brands that are 6 Elguindi, Jutta, Advantages and challenges of increased antimicrobial copper use and copper mining, Applied Microbiology & Biotechnology, July 2011, Vol. 91 Issue, p U.S. Geological Survey, Copper, p Market Watch, Freeport-McMoRan Copper & Gold Inc. March 5, Retrieved from: 9 Goto, Shihoko, Top 10 Copper Producing Companies, Copper Investing News, January 13, Retrieved from:

4 traded on the LME, Mopani Copper Mines PLC, 73% of which is owned by a Glencore subsidiary 10, and Konkola Copper Mines. It may be important to note that Chile s copper mines are completely nationalized 11, while Zambia s mines were privatized in Despite these seemingly opposed national policies on a resource that is integral to both economies, they both have had positive results judging by macro indicators like GDP growth rates 13. However, especially in the Zambian case, proving that the mines have given broad-based higher incomes with greater job security in fair working conditions is rather difficult. Copper Purchases A large share of copper purchasing is done through futures trading on two exchanges the London Metal Exchange (LME) and the New York Mercantile Exchange (NYMEX). 90% of copper futures trades are done on the LME. 14 Each LME futures contract earmarks the purchaser a lot size of 25 tonnes of copper 15. For the month of August 2014, LME copper futures contracts had a trading volume of 2,750,776 transactions. 16 This is twice the trading volume of nickel, half the trading volume of aluminum and about the same trading volume as zinc. 10 Glencore International, Mopani. Retrieved from: 11 In Article 1 of Chile s State Ownership and Mineral Rights Code, the following is stated: The State has absolute, exclusive, inalienable and imprescriptible ownership of all mines. Retrieved from: 12 The Impact of Privatisation on the Zambian Economy, Retrieved from: 13 According to data retrieved from IndexMundi, Zambia has been growing between % a year since 2000, and with the exception of 2009, Chile s GDP has been growing at 2-6% since Traders Log, Copper Futures, Copper Futures Contract Specifications, Retrieved from: 15 London Metal Exchange, Future Contract Specification, LME Copper Futures. Retrieved from: 16 London Metal Exchange, Monthly Trading Volumes. Retrieved from:

5 Despite the high volume of trade on mostly electronic platforms, copper futures do not have a synthetic price. Like primary and copper scrap markets, copper futures deal with high purity copper and these three markets have a long-run relationship in terms of price linkages. 17 Copper Usage In 2012, total world usage of refined copper was approximately 18.8 million tonnes. This is roughly 78.7% of the capacity of all world refineries. 18 About 12 million tonnes of this usage occurred in Asia 19, with the majority of this usage taking place in China of course. Market Positions Africa only has a 5% slice of world copper production. 20 For African countries with copper reserves, such as Zambia and the DRC, who together form Africa s copper belt, OPEC-style cartel formation is not a viable option given their small market share. However, for these and other copper producing developing countries in Asia such as Laos, Mongolia and Myanmar, copper services and value-added copper refining should be pursued, assuming the availability of the right labour and technology. LME registered copper warehousing is severely lacking outside of Europe and North America. There is not one LME registered copper warehouse in Africa, South America or India and very few in Asia. 21 Given the amount of copper purchases on the LME, the amount of construction and resource projects occurring in these regions, their close 17 Aruga, Kentaka, Price Linkages in the Copper Futures, Primary and Scrap Markets, Resources, Conservation and Recycling, Issue 56, 2011, p International Copper Study Group, World Refined Copper Production and Usage Trends, , Retrieved from: 19 International Copper Study Group, Copper Mine, Smelter, Refinery Production and Refined Copper Usage by Geographical Area. Retrieved from: 20 London Metal Exchange, Copper Production and Consumption. Retrieved from: 21 London Metal Exchange, Warehouse Locations, Copper. Retrieved from:

6 proximity to major copper mines and somewhat close proximity to major financial centres (e.g. Buenos Aires, Johannesburg, Jakarta) 22, copper warehousing in these areas should be economically worthwhile. Copper refinement would be the next logical step for copper producing countries looking to move up the value chain and improve employment opportunities with higher incomes for their citizens. However, the two major copper importers, the U.S. and China, have tariffs on refined copper at 1-3% 23 and % 24 respectively. It is important to note that unrefined copper faces no tariffs for U.S. import. 25 This is not unlike the situation cocoa-producers in West Africa face in trying to access the European market with higher valueadded cocoa products (e.g. cocoa paste). OECD countries eliminating tariffs on refined copper would provide an important incentive for fledgling copper producers to diversify their production. A more ambitious game-changer for African metal producers would be the establishment of an open exchange market within the continent that can compete with the metal exchanges in London, New York and Shanghai. 22 In the Global Financial Centres Index released in 2012, Buenos Ares ranked 67th, Jakarta ranked 62nd, and Johanesburg ranked 55 th. - Qatar Financial Centre Authority, The Global Financial Centres Index 11, March 2012, pp Retrieved from: % for refined, 3% for copper wire - U.S. Geological Survey, Copper, p % for MFNs in the WTO and 4.4% for everyone else - China Mining Association, 2012 Tariff Reduction Will Conduce to Metal Import, December 12, Retrieved from: 22/ d52695.html 25 U.S. Geological Survey, Copper, p. 49.