What Factors have Led to the Recent Fall in Copper Prices?

December 8th, 2017 by Trefis Team
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Copper has been trading at its 3-year high level in 2017, given the strong support for the metal’s demand and limited availability of the metal. However, despite a favorable demand environment for copper, copper prices have seen a plunge of approximately 4% since the last two trading days.

In the following article we shall be discussing the factors which are driving the price of copper in a downward trajectory.

(Source: LME Website)

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Negative Outlook for China’s Property Sector & Sluggish Investment in China’s Power Sector

China consumes roughly 50% of the global copper produced, of which, almost 50% of this copper is consumed by the economy’s property power sector.

Altogether, there is a negative outlook for the Chinese property market as the imposed housing market restrictions in the country (curtailment on selling and purchase of new houses) is most likely to remain effective in the upcoming year as speculation in real estate market is still foreseen as a major threat to the financial stability of the country by the Chinese leaders.

Additionally, the investment in the Chinese power sector is most likely to remain stagnant in the upcoming year as depicted by latest numbers released by the Chinese National Energy Administration. As per the data released by the organization, the investment in power grid infrastructure in the economy remained flat at 413 billion yuan until October 2017. [1] 

Thus, these factors have reduced the overall demand for copper which has been a negative for the price of copper.

Increase in Copper Inventories

China’s winter curtailments on copper production has not been as significant as expected, thus leading to a stable supply of the metal by the world’s second largest copper producer. The copper inventory level rose by 10,650 tons as on 6th December [2] thus leading to an increased selling pressure in the metal. Additionally, stagnation in demand by China due to factors mentioned above also added to the existing inventory level.

Strengthening Dollar Index

The U.S Dollar index has been rising amid the increasing probability with respect to the implementation of the proposed U.S. tax reform. The U.S. Dollar index (DXY) measures the value of the dollar against a basket of six major foreign currencies. An increase in the value of the dollar makes dollar denominated copper comparatively expensive for foreign investors, thus reducing the overall demand for the non-ferrous metal.

(Source: Market Watch)

However, despite the recent drop, we believe that these factors are only temporarily impacting copper prices. Copper is most likely to stabilize at 2017 levels in the upcoming year, given the increasing necessity for electric vehicles, which requires copper as a primary raw ingredient.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Freeport

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Notes:
  1. Copper Bulls Are Upbeat Before the Industry’s China Gathering, Bloomberg [↩]
  2. Copper price plunges, Mining.com [↩]