Turbulence in the Markets: How Speculators Are Crippling the Copper Industry

By , Alexander Jung and Thomas Schulz

Hedge funds and other major investors are always looking for new places to park their cash. Now copper is attracting the hot money, causing the price of the metal to fluctuate wildly. Key industries are warning of the consequences.

Photo Gallery: Copper Blues Photos
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In northern Chile, on the high plateau of the bone-dry Atacama Desert, machines have cut a giant hole in the Earth's crust. The crater is three kilometers (1.9 miles) wide and almost 1,000 meters (3,280 feet) deep. It grows larger every day. And as it grows, the Chilean state becomes wealthier.

The mine on the edge of the Andes is called Chuquicamata. It belongs to the state-owned copper mining company CODELCO and is 700 kilometers (435 miles) from the San Jose mine, where 33 trapped miners were rescued last week. Six percent of all copper produced worldwide comes from Chuquicamata, one of the world's largest open pit mines.

Excavators dig through the rock with massive shovels the size of small houses, loading the copper ore onto trucks custom-made for the mine, each weighing up to 400 tons. With their engines roaring, they creep up through the hairpin curves of the road leading out of the pit. The ascent takes 45 minutes.

At the top, the ore is ground into powder, in a process yielding one ton of pure copper for every 100 tons of ore. On this particular day, a ton of copper sells for about $8,100 (€5,844) on the commodities exchanges, according to the current price CODELCO manager Rodrigo Toro sees on his computer screen. Only 24 hours earlier, the price was almost $200 higher. "The market has become very volatile," he says.

Wild Ups and Downs

Toro's office is about 1,200 kilometers south of Chuquicamata, on the 10th floor of the CODELCO headquarters building in Santiago, the executive floor. Everything here is made of copper, from the counter in the lobby to the handrails and the elevators. Metal fibers are even woven into the towels in the bathrooms.

In the past, it would have taken weeks for the market price to move as much as it did on this single day. A price change of that magnitude would have had Toro and his fellow executives deeply concerned. There would have been talk of a warning signal for the global economy. But today no one is surprised by these wild ups and downs.

This year, the price went from $6,400 in February to $8,000 in April, then plunged to $6,100 and is currently rushing back up toward $8,900, which would be an all-time high. The metal has become an object of speculation, and the copper business a playing field for deep-pocketed gamblers. Price movements have less and less to do with the product itself. In fact, the prices are set elsewhere -- in New York, for example.

Going Long or Short

In Manhattan, only one block from Ground Zero, 12 men are sitting at a round table in a windowless room. If it weren't for the countless flashing screens and electronic display panels, they might resemble a group of old men who had gathered to play poker. But these men are copper traders who have gathered at the New York Mercantile Exchange (NYMEX), the world's largest physical commodity futures exchange.

They trade in futures contracts, or agreements that obligate them to sell highly pure copper at a fixed price on a specific date. Each contract represents about 11 tons, with a current market value of roughly $95,000.

Sometimes they go "long," which means betting that prices will rise. Or they take short positions when they expect prices to fall. These traders no longer have any interest whatsoever in the metal itself.

Traders today deal in unimaginable sums worldwide, with securities worth more than $20 billion changing hands every day. Last year, copper futures corresponding to 1.13 billion tons were traded on the world's four largest copper exchanges, in London, New York, Shanghai and Mumbai. It was 71 times as much copper as the industry actually produced in the same period.

Appeal of a New Investment Class

The traders work on behalf of banks, insurance companies, pension funds and hedge funds specializing in commodities. They have all discovered the appeal of the copper business, especially after two US professors in 2004 predicted a bright future for commodities as an investment class of their own. Their paper attracted great attention in the financial world.

It had come at just the right time. In the wake of the New Economy bubble, there was a strong demand for palpable value that everyone could recognize and understand. Finally there was the prospect of an alternative to risky investment in stocks, bonds and foreign currencies, and their derivatives. Since then, more and more capital has been surging into the markets for petroleum, natural gas, sugar, cacao, nickel and aluminum. And copper.

The recent turbulence involving the euro and the dollar has fueled the development even further. The more money floods into these markets, some of which are relatively small, the greater the price volatility. All it takes is for one important player to make a big move, followed by a second and a third player -- not because of some deep insight, but simply out of the fear of missing out on something -- and the entire herd follows in their footsteps. Eventually, one member of that herd suddenly comes to a stop and starts running in another direction, simply because someone has issued a new rallying cry.

This herd mentality causes prices to take off, and they become more and more disconnected from actual consumption. The consequences, however, are very tangible for those who depend on the physical commodity in the real world: the construction industry, for example, which uses various products containing copper in pipes, roofing material and facades.

Warnings from Industry

Copper is also the core component of almost every piece of cable, be it in the form of bell wire or the thick cables that connect offshore wind turbines with the land.

The metal is practically indispensable for producers of electronic devices. Every computer, mobile phone or vacuum cleaner depends on copper. And so does every car. An automobile contains an average of 25 kilograms of copper, at a current value of about €150.

Industry has trouble coping with sharp fluctuations in the price of copper. It is difficult for companies to plan ahead if the prices for their raw materials are constantly changing.

Business leaders like Ekkehard Schulz, the outgoing CEO of German steelmaker ThyssenKrupp, warn that the price fluctuations could have devastating consequences for industry. The Federation of German Industries (BDI) emphasizes the importance of a "safe, reliable and affordable supply of commodities." Without that, says the BDI, "production in Germany would be inconceivable."

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Graphic: Copper prices Zoom
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Graphic: Copper prices


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Graphic: Raw materials prices


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