Copper: Copper has become a speculative superconductor. The red metal busted through $10,000 a tonne on February 4, making it three times more expensive than it was at the beginning of 2009. Fundamental factors partly explain the rise, but won't stop a steep fall when financial investors lose interest.
The reason for the excitement is China. Copper is needed to build houses, cars and air conditioning units, and China's plans to urbanise 400 million people in the next two decades demand lots of the stuff. China's consumption of copper has increased nine-fold in the last 20 years, making it the final destination for 40 percent of global production. When the Middle Kingdom raised interest rates on February 7, copper wobbled below its record highs, showing how closely the two are bonded.
As in any good commodities story, supply has fallen behind. In 2011, there should be 19.1 million tonnes of refined copper produced worldwide, roughly the same as consumption in 2010. If China's needs grew 8 per cent, and everyone else's stayed flat, the world would face a 500 million tonne shortfall, enough to swallow up the entire stock of the world's three main copper exchanges.
In the long run, that isn't sustainable. Supply must increase - or demand must fall. Much above $10,000, and building projects may be put off. With production costs around $6,500 a tonne, miners have big incentives to dig faster.
In the meantime, financial investors have intensified the price swings. Exchange-traded funds mean retail investors can now play copper prices as a gold-like inflation hedge. Unlike gold, global copper stocks are relatively small, meaning ETFs can noticeably move the price. Last December, it emerged that a single trader had cornered 90 percent of the stocks on the London Metals Exchange.
China, meanwhile, can be fickle. It now seems to be exporting copper stocks, for example, despite tight supply. If the country turns out to have an overhang of unwanted homes, say, things could change rapidly. Tight supply should see copper prices comfortably above the cost of production for two or three years yet — but at current levels, even small surprises could send the red metal down hard.
