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The copper industry illustrates all the factors on the demand and supply side of a Competitive Market that determine the price of copper and cause changes in that price. In addition, the copper industry serves as a signal for the status of the global economy. Because copper is used in so many industries around the world, the metal has been given the name “Dr.Copper” since a strong demand and high prices for it can indicate that the overall economy is healthy.
In February 2011, copper prices reached an all-time high of $4.62 per pound, having almost quadrupled after a two-year series of increases. At that time there was a fear that this rally in prices had stopped, given speculations about events in China. Previously, traders and industry observers had thought that China had an insatiable demand for the metal. However, rising interest rates in China could have forced speculators to sell copper to reduce their financing costs, while consumers kept their inventories low to save capital. At this time previously unreported stockpiles of copper were also discovered in China, many of which were in bonded warehouses where traders stored goods before moving them in or out of the country. Analysts observed that these supplies could easily have been moved into the market.
In April 2011, copper analysts worried about further decreases in prices. The worldwide economic downturn had caused demand to decrease in key markets, such as housing and construction. Copper consumers had reacted to previous high prices by seeking cheaper alternative substitute materials, such as aluminum and plastic. In June 2011, analysts reported that copper prices surged to the highest level in two weeks due to the reporting of better-than-expected Chinese industrial production data. Unfavorable U.S. economic data and concern over Chinese inflation had caused prices to decrease, but the industrial output report indicated that demand could increase again. However, later that month concerns over economic conditions in Europe, an important consumer of copper for plumbing and electrical wiring, put further downward pressure on prices. On the supply side however, the low price of copper forced mining companies to decide whether certain high-cost mines should be kept in operation. However, a new mining process called “solvent extraction” also allowed some companies to mine copper at a lower cost, which permitted more copper mines to stay in business.
Going forward, the extreme volatility of the copper market was illustrated in September 2011. On September 27, the Wall Street Journal reported that copper prices rose sharply, given a report that the European Union might expand its support of the Euro zone’s troubled banks and a Federal Reserve Bank of Chicago report showing increased manufacturing output in the Midwest region of the United States. However, one day later it was reported that price declines had erased the previous market increase of more than 5 percent as investors continued to worry about the European financial crisis and whether previously anticipated strong imports into China might occur.
Copper prices continued to be influenced by the demand from China. This demand slowed in 2008 as the Chinese drew down their inventories when global prices were high and shut down some industrial activity preceding the Olympics in August 2008. The slowing Chinese economy in fall 2008 also impacted the world copper market where prices continued to fall. An analysis of a substantial decline in copper prices 10 years earlier from November 1997 to February 1998 illustrated many of these same factors. The 1997 financial crisis and recession in Southeast Asia had a significant impact on the copper industry, as did uncertain demand from China and the increased use of copper in communication technology in North America. Expectations also played a role as many copper users were hesitant to buy because they thought prices might continue their downward trend.
Similar factors affected the copper market in 2006 and 2007. Analysts predicted a decrease in the supply of copper in 2007 after many strikes limited production in 2006. This decreased production along with strong worldwide demand caused the price of copper to remain at historic highs during that year. Much of this demand was stimulated by the Economic Growth in China. A lack of new mining projects also limited supply, given that many large, known copper deposits were in areas with unstable governments or were difficult to reach. Another impact of the high prices was the increased theft of copper coils in air-conditioning units, copper wires, and copper pipes used for plumbing in homes and businesses in many parts of the United States. Thefts, even of cemetery bronze vases containing large amounts of copper continued with the relatively high prices of copper in subsequent years. However, the high copper prices also gave many copper users the incentives to find substitutes for the metal.
Forecasts of future prices and production can be very uncertain, given the variety of factors operating on both the demand and supply side of the market. One report estimated a surplus of 108,000 metric tons for the first 11 months of 2006, while another estimated a surplus of 40,000 metric tons for the entire year. The extent of substitution with other products was also difficult to estimate, as was the substitution with scrap metal. Moreover, in February 2007, the first impacts of the slowing housing market on the U.S economy were just beginning to appear. This is another example of changes in the macroeconomy impacting this industry, leading to the name “Dr.Copper”.
[Source: Cui,C & Shumsky,S.(2011). Dr.Copper Offers a Mixed Prognosis. Wall Street Journal (Online), April 11, 2011]
Question 1
(a) In March 2010, Chile, one of the world’s largest producers of copper was hit by a massive earthquake.
Use a supply-and-demand diagram to evaluate the effect of the earthquake to the production of copper on the global market in 2010. In your diagram, demonstrate a shortage of copper arising in the market.
(b) With the shortage, how would you expect the price of copper to change in 2010? Justify your answer.
(c) Based on the case above, provide TWO (2) separate explanations for a price fall of copper using shifts in both supply and demand.
(d) Referring to the case above, it is understood that copper consumers switch to alternative substitute materials such as aluminum in response to a change in price of copper.
Use the concept of cross-price elasticity of demand to evaluate how a price change of copper affects the demand for aluminum in the market. (3 marks)
(e) Consider the copper industry is characterized by a perfectly competitive market. Critically assess the market power of each copper producer and their profitability in the industry in the long-run. (9 marks)
Question 2
(a) On March 13, 2014, The Straits Times (Online) reported that Xiaomi, a Chinese smartphone company, sold out 5,000 of its Redmi phones in Singapore in 8 minutes after its online sales kicked off.
- i)Invoke the price elasticity of demand to evaluate the effect of the online sales on the total revenue received byXiaomi for selling its Redmi phones.
- ii)Supposed now there are more Chinese smartphone makers expanding their business to Singapore. Justify how this event might change the price elasticity of demand for Xiaomi’s smartphone?
(b) Eastman Kodak Co., one of the most well-known and once successful companies in the United States, filed for bankruptcy in January 2012. This was a substantial change in direction for a company that once dominated its industry and had a near-monopoly on camera film which earned its profit that it paid out to workers on ‘wage dividend days’. The company invented the digital camera in 1975, but then did not develop the new technology. In the film market, Kodak lost market share to foreign companies in the 1980s and stopped making investments in film in 2003.
- i) Based on the information above, suggestTWO (2) characteristics that are relevant to Eastman Kodak as a near monopoly.
- ii) Critically evaluateTHREE (3)economic arguments against a firm monopolizing the market.
Question 3
| Year | Nominal GDP ($mil) | Real GDP ($mil) |
| 2015 | 300 | 300 |
| 2016 | 325 | 310 |
| 2017 | 340 | 320 |
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