Copper Prices at Lowest Point in Six Years

Commodities, Investing & Retiring

There have been rough times in the commodity markets, but copper has been hit especially hard. From an early-2011 peak that approached $10,000 per metric ton, copper lost nearly 30% of its value in mid-2011, and after a brief recovery, has slowly dropped to its current price ($2.534 per pound or $5,575 per metric ton as of this writing). That is the lowest price since the massive 2008 slump that saw prices rapidly drop below $1.50 per pound.

Has the copper price bottomed out, and is it time to buy? That is not a simple call.

Copper prices are far more difficult to predict now. Copper stocks have come into increasing use as a financial tool because of its relative liquidity, thus the demand is split into two components – those who are using it solely as a financial vehicle and others who are using it for manufacturing purposes.

Much of the blame is being laid at China’s feet, and not just because of its decline in growth. China is responsible for up to 40% of worldwide copper purchases and tends to use significant amounts of copper as trade collateral. MarketWatch reported estimates of up to 60% of China’s copper stock being used in this fashion.

With the recent drop in China’s economy, some copper-backed loans and financial vehicles are beginning to unravel. Some analysts are concerned that the issue with copper prices and the Chinese financial system may spiral downward in the short term before finding a new price equilibrium.

Most analysts are adjusting their copper price forecasts downward. Standard and Poor’s recently dropped its forecast for copper from $3.10 per pound to $2.70 per pound for 2015 and 2016, and in November 2014, Goldman Sachs lowered their estimate to nearly $2.83 per pound. Since this is above the current price, minor growth is implied.

For a slightly different view, The Economic Times of India reports that global copper analyst, economist, and veteran China-watcher Simon Hunt expects prices to stabilize in mid-2015, followed by a sharp rise and a subsequent steeper fall again starting in early 2016 – possibly dropping below $1.00 per pound in 2017. McNeil Curry of Bank of America echoed back in 2014 that a short-term surge in copper is likely just that, saying, “…gains are temporary and should be limited.”

Copper prices are being hit from all sides: a current supply glut, lowering world demand, a secondary demand based on Chinese financial dealings that may be unraveling, and the combined effect of a strong U.S. dollar and low oil prices putting pressure on dollar-denominated commodities.

Also, consider that copper prices are still somewhat high in a long-term historical context. The trough of the sudden late 2008/early 2009 drop in prices (near $1.50 per pound) matched the price in early 1989. It took until early 2004 to surpass that level, and for the entire period of 1998-2004, copper never broke $1.00 per pound ($2,200 per metric ton).

Copper prices are probably headed to a new and lower equilibrium point. There is likely some more pricing room to short-sell copper futures in the early portion of 2015, but beyond that, we urge caution. So far, most indicators argue against buying copper and copper stocks for longer-term holdings. It will take more than a strong U.S. economy to drive demand upward – real long-term global growth has to trend upward first, not just growth based on governmental economic stimulus.

(DISCLAIMER: The author of this piece has no holdings in copper.)

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