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Copper Prices: High and Rising

Historical price peaks and low warehouse inventories are bad news for OEMs.

Where is copper headed? In April of 2006, the copper price broke $4.00/lb for the first time ever, spurred on by fund buying and continued low stock levels. Most analysts do not believe prices will remain up at current levels. Similar to last year, which in hindsight was wrong, the general perception is a peak followed by a fall in prices during 2006. Following average prices of $1.30/lb in 2004 and $1.67/lb in 2005, the average copper price forecast for 2006 is $2.75/lb and $2.40/lb in 2007.  This is well below today’s price of $3.50/lb.

Commodities attract mainstream investors. Recent high copper prices have seen "The Funds" become a significant factor within the base metals marketplace. Although relatively little is known about "The Funds" they have an increasing influence on metal prices. The amount of capital invested in commodity index funds surpassed $50 billion in 2005 and is likely to exceed $100 billion by 2010.

Global copper inventories are at approximately 95,000 metric tons in the COMEX and LME warehouses.  These are historical and critically low levels. Years of under-investment have resulted in shortfalls in supply, which failed to meet strong demand growth, particularly from China.  A number of labor contracts at copper mines are due to expire over the next few months.  The threat of a strike at a major strike at a major copper producer would provide further fuel to prices.

Most industry experts believe that the current price levels are unsustainable. Over the longer term they will have a negative impact on consumption as other materials are substituted for copper where possible. However, the costs of other materials are also rising. All metals prices are high, and rising oil prices mean that prices for plastic products are also way up. This is lifting the price at which a decision to substitute alternatives for copper is taken.