Coppers on copper

Steady hikes throughout the last few years, powered by China’s demand, have made commodities, quite literally, hot enough to steal.

The most on-point example is copper. Prices shot through the roof last year, peaking in May. They have been settling down at tiny intervals in recent weeks but the metal is still dear enough to attract thieves. In the last few months the number of copper thefts in Europe and the US has become an indicator of the state of the market.

"We think that because of a shortage of copper in China, prices are at an all time high," a spokesperson for Lincolnshire police force in the UK, told the Evening Telegraph in June. Police officers are not economists but they are usually quick to spot changes in society.

"There were 18 (copper thefts) this month. There didn’t use to be any in the past," explained Lincolnshire West Division officer Rachael Hill. Thefts have also been reported in Italy (from a high-speed rail link), the US (from air-conditioning units), Germany and Scotland.

"Apparently copper prices are going down again now. We’re hoping that as soon as criminals become aware of this, they will stop stealing it," Hill said.

Hill’s hopes match the predictions of analysts but changes are not likely to come quickly. Having spiked in May at US$8,700 per metric ton – two and a half times the July 2005 price of US$3,400 – copper prices declined to about US$7,000 per metric ton in early July, lower than the record but still way above anticipated levels. Economists say slight downturns in copper prices signal a break in the market but, while the slide has been comparatively small, the trend is likely to continue over the next few years.

Unfortunately, long-term predictions are difficult because there is a new element to consider: China. The country’s massive demand brings a new factor to the equation as its influence pushes prices beyond anyone’s expectations.

Wrong-way bet

The phenomenon was underlined at the end of 2005 by a Chinese state trader who single-handedly pushed up copper prices by betting that the price of futures contracts for the metal would fall. The government was later forced to buy copper furiously and even dip into reserves to fulfill delivery requirements. The massive buying spree pushed copper prices up to unprecedented levels.

The current high demand has brought commodities markets out of near stagnation a few years ago. For example, in 2002 mining giant BHP Billiton slowed down production of copper because there just was not enough demand. Fast forward to 2006, and miners are looking to pump out as much as they can as prices are at an all-time high.

And all fingers are pointing to China as one of the main reasons.

"There really isn’t another growth market in the world," said John Mothersole, a commodities analyst with Washington-based Global Insight.

China may be the driver but there are in fact a number of factors – above and beyond last year’s copper debacle – that have come together to drive up prices.

One is a deficit in the market. There is not much surplus copper and supply is having a hard time keeping up with demand. The short supply has been exacerbated by labor disputes in Chile – the Saudi Arabia of copper – and Peru.

Then, in recent months, there has been an unusually large amount of cash invested in commodities, which is largely a by-product of investors channeling money out of stock markets in April and May.

Another factor worth mentioning is Japan’s economic recovery. After years of sluggishness, Japan is rebounding and the recovery looks to be reasonably stable, not a here today, gone tomorrow spurt of energy. The result is renewed demand for commodities and an upsurge in a traditionally strong market.

And then there is China – and an emerging India – to consider. Demand from China does not look like it’s going to slow down and that’s true of just about every commodity from nickel to iron ore.

However, Mothersole warns that the party isn’t going to last forever – simply because the market is behaving in an abnormal way. Just as prices have moved in thoroughly unexpected upward curves, he expects them to fall as markets "can’t escape their fundamentals for too long".

From here on in it may be all downhill, he said. Global Insight sees copper prices declining to about US$6,300 per metric ton by the end of this year, US$4,800 by the end of 2007 and down to a distinctly cool US$3,800 by the end of 2008.

"Our price [predictions] are developed in the context of the fundamentals as we see them," Mothersole said. These predictions include very strong growth in China, the country that "is clearly, in the context of base metals, powering the markets".

After years of supply playing catch-up with demand, new production bases are coming online and more efficient delivery methods are beginning to play a role. Liang Haisan of China International Futures, which took about 8% of China’s copper futures last year, said prices are likely to remain flat when all is said and done this year.

"The trend for this year will be consolidation. But the market is volatile," he said. "Nobody can tell what’s going to happen."

Prices are going down from the highs in May but at almost US$7,000 per metric ton (US$5,000 in the black market), copper is still expensive enough to warrant the risk of jail. Hill, and police officers around the world, may just have to steel themselves for a long wait before seeing any significant declines.