Supply and demand: we all know how this works. If there’s too much of something (whether bricks, maize or tomatoes), there’s a glut and the price goes down – because the product is so easy to get that people can shop around for a good deal.

Conversely, if there’s not enough, there’s a shortage and the price goes up – because people want the product so badly, and there’s so little available, that they’re willing to pay more.

The price of a commodity at any time reflects the balance between availability (supply) and need (demand).

Fluctuating prices serve a valuable economic purpose. When there’s a shortage, the rising price tells businesses that it’s an area worth investing in. This increased investment creates more product, alleviates the shortage and causes the price to fall again.

This is what happened in the copper market from about 2003 onwards. Increased demand from China’s rapidly expanding economy pushed the price up. The world’s copper companies responded by investing massively in new mining. Zambia’s mining companies alone invested more than $12 billion in new production.

“Fluctuating prices serve a valuable economic purpose”

In 2003, copper was trading at about $2 000 per tonne; ten years later, on the back of continued Chinese demand, it had shot up to more than $8 000 per tonne. But by then, China’s rapid economic growth had started to slow. Demand for copper was still increasing, but not as rapidly as previously. The result was an oversupply of copper. Given the long lead-time to bring mines into production, these trends cannot easily or instantly be stopped or reversed.

The copper price went into a four-year nosedive from 2011 to 2015. Unfortunately, costs did not follow, and the world’s copper mines plunged from profit into loss, and had to cut production and operating costs. It is only now that the price has slowly started to claw its way back, as global supply and demand start to come back into balance.

copper-cylinders

Analysts are divided over exactly where copper is heading in the short to medium term. Some see the price hovering at current levels for at least the next two years before rising again; others foresee a sustained increase sooner.

However, on a longer 10-year-plus time horizon, analysts agree that the future for the red metal is good. Worldwide, and not just in China, countries will continue to develop and industrialize, and industrialization cannot take place without massive consumption of copper. This will drive demand, which will be good for the price.