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
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
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 was vice president of strategic
metals for the North American operations of BICC
Cables Corp. in 1985 (now owned by General Cable).
More recently, he was director of metals
management with Scott Brass, a producer and manufacturer
of copper and brass strip products.
To receive a sample copy of
The Copper Journal, give
him a call at (401) 667-0478 or e-mail him at
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.