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Copper’s largest one-day fall
Tuesday 5 December was copper’s worst day in almost three years, with many analysts blaming a rise in inventories for the fall. More important, though, might be hedge funds pulling back on risky positions ahead of Christmas – and leading copper to pull back just below $6500 a tonne.
While rising inventories probably played a part, large western holders and Chinese reserves have been manipulating for years, adding copper to drive prices down. At this point, that shouldn’t come as a shock to the markets.
What does the future hold for copper?
Though the price of copper has fallen back for now, the wider introduction of electronic cars should see a large upside on the horizon.
Copper is needed for the production and running of electric vehicles, and soon miners may struggle under the weight of increased market demand. New copper mines are increasingly difficult to find, and though expansion of existing mines is also an option, many have already been expanded beyond their means.
Some analysts have predicted that copper prices could rise to as much as $10,000 per tonne as demand increases. It’s possible that the market price could reach $7000 per tonne before January, and $9000 toward the end of 2018 – making $10,000 a reasonable estimate within five or ten years.
Electric vehicle revolution
Copper isn’t the only metal that could benefit from the trend toward electric vehicles, lithium, which is needed to make batteries, could also see a surge. We could even see a deficit as miners struggle to keep up with the growing demand.
While many fund managers may worry that battery chemistry could evolve and make lithium redundant, it’s unlikely that to be replaced anytime soon – at least not for ten to 20 years, as scientific development has slowed significantly.
How China affects market prices
China looks likely to be the main driver of market price movement for copper and lithium for the next two years at least. As a communist state, the government is able to push policy for electric cars out nationwide. Over 22 million electric bicycles have already been introduced, with electric taxis and cars expected in numbers larger than for any other country.
China’s focus on electric vehicles is mostly driven by the increasing levels of pollution seen in major cities across the country. And it doesn’t look like copper and lithium will be the only markets to feel the effects from this initiative, with other policies – such as pulling the plug on ferroalloy-producing furnaces that use excessive amounts of electricity until further notice – likely to reduce China’s ore consumption.
With large factories not processing ore for the foreseeable future, markets may see a surplus that could drive down prices. Although good for buyers, it will negatively impact the mining industry.
Bitcoin: commodity or currency?
Fundamentally, bitcoin is a currency. Although bitcoin production is referred to as mining, it is important to establish that it does not carry the same meaning as commodity mining.
That’s not to say that Bitcoin can’t affect the commodity markets, though. It’s probably taken liquidity out of other commodities, as investors pull their capital out of gold and other metals so that they can buy the cryptocurrency.
However, this shouldn’t be a long-term issue. As long as volatility remains sky high, bitcoin doesn’t work as a means of payment, meaning it has no use other than trading – unlike gold, which can be used for technology and as a store of wealth. Though it has seen a drop in price, inflation is predicted to see gold bounce back in 2018. It could even reach $1350 to £1400 an ounce, as investors hedge against economic uncertainties.