The price of copper is determined primarily by the ability of copper suppliers to extract and transport the product, as well as the demand for goods and services that require copper. Other broad factors include interest rates, economic growth, the availability and attractiveness of substitute goods, and political considerations.

Macroeconomic Factors

Even though copper has been mined and used by mankind for more than 10,000 years, new uses continue to be discovered today. Copper is found in nearly every home in the United States and Europe because of its use in wiring, piping, heating, and cooling. In fact, it is the world's third-most-used metal (following iron and aluminum) because of its versatility and conductivity.

Key Takeaways

  • Copper is used in many ways, including plumbing, wiring, heating, and cooling.
  • Although used for more than 10,000 years, new ways to use the metal are discovered today.
  • Macroeconomic factors, like demand, are key drivers of the price of copper.
  • U.S. and China are the biggest consumers of the metal, and the health of these two countries has an important effect on copper prices.
  • Hedge funds with a commodities focus also influence the short-term moves in the copper.

Copper prices dropped dramatically towards the end of 2008 during the height of the financial crisis and the decline of the housing market. This tie to housing meant that copper struggled more than most metals, such as gold and silver, during the recession.

Like most industrial or agricultural commodities, a large number of macroeconomic factors that influence copper price movements, which include the price of alternative base metals such as aluminum, nickel, lead, and iron. Rising copper prices during the mid-2000s eventually led to advanced uses of aluminum as a substitute in power cables, electrical equipment, and refrigeration tubes.

Systematic variables, such as the weather or time of the year, can affect copper production, demand, or transportation. A large portion of the global copper supply originates in South America, particularly in Peru and Chile. Worker strikes against copper-producing mines are not unheard of in these regions, and any worry about geopolitical instability can force prices upwards. On the other side of the equation, the U.S. and China are two nations that are very large buyers of copper. The health of the world's largest economies has a strong influence on nearly every commodity.

Global Copper Consumption

The high rate of global copper consumption requires a high level of ongoing production. Profitable extraction depends on a large number of variables: government tax rates and regulations, inflation levels, labor wage rates, effective management of copper extraction and production firms, and cost-efficient mining techniques.

There are also trading considerations built into copper prices. Copper futures help guide the way for future investments, project development, and the number of firms in the copper industry. In addition, the proliferation of hedge funds with a commodity focus can actually increase short-term volatility for copper prices through large purchases or sales.

It would be impossible to understand and list all the variables that influence the price of any internationally traded commodity. Even if it were possible, it would be even more difficult to weigh these factors appropriately. For this reason, copper speculators have an influence in driving market prices based on unfolding news events and the best guesses of today's entrepreneurs.