Copper Is Due for a Fall

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Includes: DBC, JJCTF
by: Fred Mallon

It has, of course, become a sport to call bubbles all over the place. Given the rapid changes in prices this nomenclature is certainly deserved in some cases. Recently, the price of copper has surged from about $1.25 per pound to almost $3 per pound. This rapid advance (starting to approach highs reached during the boom years of $4 per pound) brings to question the sustainability of such prices.

About 50% of copper is used in making copper wire; however, aluminum can be used as well if the prices dictate. Early technical problems in the 1970’s with aluminum wires have been overcome and appropriate prices will lead to replacement. Data from the USGS (minerals.usgs.gov/ds/2005/140/) can be used to calculate the historical relative cost of Aluminum to Copper (below).


From the chart a relative price of about 0.5 would seem to be the precipitating event that would drive copper wire replacement (since that was the relative cost that drove the replacement in 1970’s).

The current ratio based on LME spot prices is 0.32 (much lower than the ratio which previously drove replacement). Furthermore, a substantial fraction of the use of copper is in building construction which means that a downturn in Chinese construction should crimp demand.

In other words, the price of copper should decline for two significant reasons. One, aluminum is currently priced so that it can compete effectively with copper. Two, when the building boom in China ends, the demand for copper should decrease substantially. While commodities may prove to be a good investment during times of high inflation, copper seems to be one that should underperform.

Disclosure: No Positions