Copper prices, which are historically highly volatile, have continued their downward spiral in 2015 — the fourth year in a row. As of late July 2015, the world price of high-grade copper on the London Metal Exchange dipped below US$5,200 per metric ton, down more than 25 percent from the same time last year and almost 50 percent below its $10,000 peak in 2011. According to market research firm IBISWorld, the price decline is mainly a result of a production surplus and weakened demand from China, the world’s largest consumer of copper, which is currently experiencing a major economic slowdown. In the second quarter of 2015, the GDP of mainland China has grown at its slowest rate since 1990, an estimated 7 percent.
In addition to China, the European Union is also struggling, and even emerging markets like Brazil and Russia have seen growth stall in the past two years, all of which contribute to declining demand for copper. The United States, on the other hand, is seeing increased activity in construction and industrial output — fueling steady demand for the metal. However, the economic performance of the U.S. is not enough to make up for slowing copper demand from other parts of the world.
Looking Forward: Renewable Energy Impact
While current circumstances signal challenging times for copper producers, IBISWorld sees an improving U.S. economy, along with global trends in renewable energy, holding up demand and stabilizing prices for copper in the next two years. Copper is widely used to manufacture wire, electromagnets, circuits and grounding wires — key inputs for energy production equipment. With the push in many countries to invest in renewable sources of energy, namely wind turbines and solar panels, demand for copper products will expand and fuel an increase in prices. On a related note, the increasing demand for hybrid and electric vehicles will maintain the need for copper because these vehicles require two to three times more copper than their gasoline-fueled counterparts.
Although IBISWorld anticipates copper prices will rebound slightly in 2016 and 2017, the impact of the slower Chinese economy, which historically accounted for nearly 50 percent of global copper consumption, will keep prices from rising at a faster rate. Nevertheless, considering the volatile nature of commodity prices, supply management practitioners should take advantage of current pricing conditions, if possible, and lock in rates before copper prices return to growth.