Is the world running out of copper?
It’s a sobering headline and it reads —
“Evidence of a looming supply squeeze is mounting on the London Metal Exchange, where (copper) inventories are at their lowest levels in almost 15 years — only enough to last users a little more than a day. A year ago, they would have lasted five.”
And to be fair, it does sound apocalyptic. But like most stories, there is more to this than what meets the eye.
So let’s break this down, starting with the London Metal Exchange (LME). As the name suggests LME facilitates the exchange of metals. But not all metals — only the non-ferrous kind. Meaning you can’t trade steel and iron, instead you’ll have to dabble with aluminium, copper, gold, silver, etc.
On most occasions, end consumers looking to source copper might already have tied themselves to long term contracts with suppliers they already know. But if you don’t have the right connections, you can always buy and sell copper on the London Metal Exchange. You could do future contracts — where you agree to buy or sell copper at a later date. Or you could do spot contracts — buy and sell this stuff on the spot.
And the problem with copper right now seems to be isolated to the spot market i.e. if you wanted to buy copper this very moment, you’d probably have to shell out a lot of money.
So how did it get here?
Well, you could blame China.
No, really.
Blame China.
The Red Dragon has been pumping out cars, smartphones and electric cables ever since emerging out of the lockdown and key manufacturing hubs are buzzing with activity. So the story goes that supplies were being driven to China because the demand has been rather overwhelming these past few months. Also do note the recovery in China preceded recovery in other parts of the world. So they had a veritable advantage in sourcing key supplies.
Even private traders elsewhere seem to be hoarding copper fearing a fresh wave of coronavirus reinfections. After all, if future lockdowns cripple supply chains once again prices could reach stratospheric levels. It’s not a very enticing proposition. So best hoard reserves now, right?
Well, yes. But that creates a problem everywhere else — like at LME. In any case, as prices keep increasing, some of these hoarders will eventually relent. They’ll start offloading some of their inventory and the supply crunch should ease rather quickly.
So is the world running out of copper?
Not quite. But if you’re trying to source copper on the spot right now, you might have to pay a premium.
Also, point of interest: Most buying and selling at the LME involves financial traders. Meaning these folks are betting on the price of copper. They don’t actually need the physical stuff, okay?
Shrehith Karkera is a cofounder at Finception.