Various estimates suggest that approximately one-third of copper imported into China may have been passing through financing deals. The use of commodities as collateral has been particularly popular in China for cash strapped companies unable to secure credit using traditional banking channels. When the oil price rises, energy costs will go up, and the copper price may rise too. Energy costs account for approximately 30% of the total cost of extracting the ore, and these costs can rise to 50% during the processing of the ores (smelting and refining). The refining of copper is above all an energy intensive process.
Therefore, the prospect of a lower profit margin acts as an incentive to decrease the supply of copper.Ĭopper prices have a relatively high inverse correlation against the dollar of around -0.45. All of the miner’s revenues will be received in US dollars, which will now buy less pesos, but some proportion of the costs will be denominated in pesos and will remain constant (at least in the short term). For example, a depreciation of the US dollar against the Chilean peso can reduce profit margins for a copper miner in Chile. As the commodity becomes less expensive demand for the commodity rises, resulting in an increase in the price and vice versa.Ī weaker dollar can also act as a disincentive to producers to increase output. At its most basic a decrease in the value of the US dollar relative to a commodity buyer’s currency means that the purchaser will need to spend less of their own currency to buy a given amount of the commodity. Like most internationally traded commodities copper is priced in US dollars.
COPPER PRICES DRIVERS
This is the third in a series of articles looking at the top 10 most important drivers behind some of the main commodity futures prices.
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