Emotions running high in copper price

by: Casper Burgering

The copper price recently fell on negative investor sentiment and Trump’s economic policy. In the fourth quarter of this year, I expect to see the price rising again.

I happen to have some old copper pipes in my cellar. I really want to sell them, but not just yet as the price is pretty low and I’m sure it still has upward potential.

The price of pure copper recently nose-dived. Dragging the copper scrap price in its wake. Investors have clearly become more nervous. Trump’s erratic economic policy, the threat of a trade war and central bank tightening (both by the Fed and the ECB) are all fanning the heightened uncertainty. With detrimental consequences for the price of copper. Which responds strongly – and more than other base metal prices – to economic shocks.

Copper has traditionally been relatively expensive and steel cheap. Pure copper fetches about EUR 5,800 per tonne, while hot rolled plate steel only sets you back about EUR 560 in Northern Europe. A significant difference. However, looking at the price trends of both metals so far this year, I may be better off searching my cellar for some old iron. Because the price of pure copper has slid over 6%, while the price of hot rolled plate steel has climbed about 9%. That is clearly a better deal.

All in all, the first six months were difficult for the copper price. In early June, the price jumped sharply and the tide seemed to have turned. Mentally, I already started calculating the value of my stock of copper in the cellar, but I was not yet entirely convinced. Because the price spike was mainly attributable to the strikes in Chile and these, of course, are only temporary. Moreover, the copper price was also receiving support from the weaker dollar, which made the metal cheaper for buyers in other currencies. And that too would be only temporary. Then came the media reports of a possible trade war and steps by the central banks to end their monetary stimulus. The price of copper immediately sank again.

The copper price trend is strongly influenced by speculation which, in turn, is fed by investor sentiment. This dictates the direction of the copper price in the short term. But the mood among investors is not an exact science, notoriously hard to predict and therefore very difficult to capture in models. The reason is that it is driven by emotions. And these emotions ran high when Trump announced that any retaliatory action by China against the current levies could lead to new import tariffs. An escalation towards a trade war is a bad scenario for the economy and this is making investors uncertain.

The erratic copper price is something we must get used to, because investor sentiment will continue to determine the direction in the short term. I expect these emotions to cool again, allowing fundamental trends – such as supply and demand – to regain the upper hand. Accordingly, I see the copper price rising steadily from its current level this year, but the pace of the increase will be slow. Because the third quarter may bring some headwind, notably due to a stronger dollar and weaker seasonal demand. On balance, I expect a shortage of copper in the second half of 2018. According to Metal Bulletin, this shortfall will run up from 1.2% of consumption in the third quarter to 2.7% in the fourth quarter of this year. So I will not seriously consider selling my stock of copper pipes until the fourth quarter. Whether my wife will be happy about the delay is another matter.