What a long, strange trip it's been for the copper market over the past 12 months.
Just six months ago, on July 2, 2008, the price of copper on Comex closed at a record high $4.08 per pound. Today, copper is trading in the $1.35 range, down $2.73, or 67 percent from that historic peak, with all indications suggesting it has further to fall. Many questions arise from this reversal of fortune. They include how and why the market rose the way it did, and, just as important, what caused the precipitous fall.
Broadly speaking, one can say the roots of this bull market have their origin in 2002. First, the bursting of the dot-com bubble pushed equity prices sharply lower. Then the horrific 9/11 attacks upon the United States sent the global economy into a downward spiral and the copper market into a near depression. That year saw global copper consumption decline by almost 200,000 metric tonnes, or 1.3 percent, the first such loss to occur in 10 years.
Indeed, the severity of the downturn cannot be emphasized enough, as the price of copper fell to the 60 cents range, a low not seen in nearly 15 years. In response to weak demand, depressed prices and excess inventories that rose to a record high 1.27 million metric tonnes in Comex and London Metal Exchange warehouses, producers slashed output in 2002 and 2003 as losses mounted.
Coincident with the actions being taken to restore market balance, consumption in China had been rising to feed that country's rapidly growing economy. Historically, the United Stated had been the world's largest producer and consumer of refined copper. In 2002, however, the equation changed, as China surpassed the United States in both production and consumption. China's appetite for metal has continued growing.
Typically, bull markets don't begin with a bang. Rather, the early stages tend to be a long drawn-out affair, with periods of doubt that the markets will ever fully recover again. But recover it did. By the fourth quarter of 2003, inventories held in exchange warehouses had fallen some 575,000 metric tonnes, or 45 percent from the peak, with the price closing above the $1 dollar level for the first time since 1997.
As 2004 got underway, it became increasingly apparent that a rising trend was developing — the copper market had attracted the attention of the speculative community, including major hedge funds. One by one, these hedge funds climbed on board, and with vast sums of money multiplied many times over with the use of leverage, bought massive quantities of copper, causing the gradually rising slope of the price curve to begin moving vertically higher.
During the first half of 2006, it wasn't unusual to see the price climb 10 cents in a single session, with more than a few days seeing a 20 cents advance. By May 2006, however, the copper market erupted in a dramatic “blow off” top, as two major speculators, with opposing views of the market, fought for supremacy in a test of nerves that only one could win. By the time the battle was over, copper had soared 44 cents in one day alone, to close at $4.08 on May 23, 2006. Once the dust had settled though, the market fell back to $3.10 just a few weeks later, and by February 2007, it stood at $2.40, off 40 percent from the high. From this point, it appeared the bull market had run its course, with expectations of lower prices ahead.
With the benefit of hindsight, however, it was not the end of the run. Throughout 2007, the concept of a long-term bull market in commodities — a ‘super cycle’ was gaining credibility. The assumption was that a new world order was emerging, wherein developing economies of China, India, Brazil and Russia, among others, would have an insatiable appetite for all commodities that would hold prices aloft for many years to come.
In 2008, we saw prices move higher across the board to include crude oil reaching a record high $145 per barrel, while copper not only recovered all lost ground, but soared back to its previous high of $4.08.
However, against this background of rising prices the global economy was in turmoil. What began as a downturn in the domestic housing market, ostensibly because of sub-prime mortgages, turned into a full-fledged conflagration, as major financial institutions throughout the world were exposed to massive losses, resulting from the proliferation of highly complex debt instruments. Almost overnight, the markets that had embraced risk with the use of easy credit suddenly became risk adverse, and the availability of credit dried up just as quickly, causing prices to collapse. During the month of October alone, copper fell more than $1 dollar per pound, representing an unprecedented loss in value.
Today, the problems facing our economy, and indeed, the global markets are many, and deeply complex. Thus, the current thinking is that prices will continue to fall until the excesses of the past several years are eliminated from the financial system. If history is our guide, however, once this phase of contraction is completed, a new cycle of growth will commence for the economy and for copper.
John Gross is president of J.E. Gross & Co. Inc, a metals management and consultancy firm established in 1987 and publisher of The Copper Journal, an industry newsletter he created in 1989. In addition to his consulting activities, Gross has worked with global leaders in the metals industry over the past 35 years. He began his career in metals in 1973 when he joined U.S. Metals Refining Co., a division of Amax Inc., where he rose to become manager of administration. In 1981 he joined Hudson Bay Mining and Smelting as manager of trading and in 1983 became a futures broker with Johnson Matthey & Wallace, specializing in metals on Comex and the London Metal Exchange.
Gross is no stranger to the electrical wholesaling industry, as he joined BICC Cables Corp. in 1985 (now owned by General Cable). While at BICC, he became vice president of strategic metals for their North American operations. More recently, he was director of metals management with Scott Brass, a producer and manufacturer of copper and brass strip products.
He is a graduate of Hofstra University in New York, and a highly decorated Vietnam veteran. During his business career, he has held memberships in several trade organizations; served as a director of the American Copper Council, and as a member of the Comex Advisory Committee. Gross is very active in industry affairs and has written extensively on the metal markets, industry issues and is frequently called upon to speak at trade events.