What is Copper

Copper is a reddish-gold colored metal that is ductile, malleable and an effective conductor of heat and electricity. Copper was the first metal to be worked with by humans and is among the most widely used metals today.

Understanding Copper

Copper combines well with other metals to form widely used alloys such as brass and bronze. Copper is considered a base metal, as it oxidizes relatively easily. It has the symbol Cu and the atomic number of 29 on the periodic table. The name is derived from the Latin aes Cyprium, meaning ore from Cyprus. The discovery that copper could be alloyed with tin to form bronze gave rise to the Bronze Age.

Copper was used to make coins along with silver and gold. It is the most common of the three metals and so is the least valued. All U.S. coins are now copper alloys, and gun metals also contain copper. Most copper is used in electrical equipment such as wiring and motors. It also has uses in construction, for example in plumbing, and industrial machinery such as heat exchangers.

Key Takeaways

  • Copper is a reddish-gold colored metal that has applications in multiple sectors, such as the housing and automotive industries.
  • Copper prices are determined by a number of factors, including demand from emerging economies such as China and India along with the U.S. housing market.
  • Copper futures contracts are used by miners and distributors to hedge against losses and are listed on futures platforms throughout the world.

Copper price determinants

The price of copper is a good barometer for the overall strength of the global economy. The greatest determinants of copper prices are emerging markets, the U.S. housing market, supply disruptions and substitution. Because of infrastructure demand, emerging markets are a key driver of copper prices. Emerging market countries have high growth rates for housing and transportation infrastructure and other types of construction. Therefore, the price of copper is sensitive to growth rates in these countries.

In the U.S., the homebuilding industry drives copper demand, with the metal used in electrical wiring, roofing, plumbing fixtures and insulation. Economic indicators that influence U.S. housing demandincluding nonfarm payrolls, mortgage rates, GDP figures and demographicsalso influence copper demand.

Political, environmental and labor issues can influence copper prices through supply and demand. Nationalization of copper mines or miner strikes can disrupt production and pressure prices higher. Natural disasters or wars can slow mine output and increase copper prices. If copper prices rise, buyers may seek substitutions. Cheaper metals such as aluminum can replace copper in power cables, electrical gear and refrigeration equipment. Nickel, lead and iron also compete with copper as substitutes in some industries.

In recent decades, China has driven demand for copper. Copper prices surged during the late 1990s and early 2000s as China's economy boomed and the country commenced a construction spree. The U.S. economy, where real estate and housing markets took off, also contributed to the increase. The metal's prices bottomed in the aftermath of the 2007-08 Financial Crisis, along with the rest of the commodity sector.

The Chinese economy helped resuscitate demand for copper. India has also picked up the mantle. Per capita consumption was forecast to grow at 4.7% annually between 2014 and 2019, outpacing 2.5% forecast for China.

Growth prospects for new industries, such as renewable energy, is further expected to boost demand. This is because copper is used as a raw material to manufacture machines and equipment, such as windmills and solar plants. However, industry dynamicssuch as longer lead times for mines to become operational and political instability in copper-producing regionsmay hinder gains for the metal.

Copper Futures

Copper futures contracts trade on exchanges around the world, including the London Metal Exchange (LME) and the Commodity Exchange (COMEX) under the Chicago Mercantile Exchange (CME).  Copper futures contracts involve the delivery of physical copper of specific quantities (outlined in the contract) at a future date.

For example, the COMEX Copper Futures contract is a monthly futures contract with physical delivery of 25,000 pounds of copper on expiration. The delivered copper should conform to Grade 1 Electrolytic Copper Cathode as adopted by the American Society for Testing and Materials (B115-00). Various actors involved in the ecosystem, including miners and distributors, use futures contracts to hedge against price fluctuations for the metal.