Candidate Name Ruben petit

Commentary 1
Number

Title of the Article Supply of copper set to outstrip demand

Date when the 9 October 2013

Article was
published

Source of the http://www.ft.com/cms/s/0/d3b95c4c-30ff-11e3-b991-

Article
00144feab7de.html#axzz2madUnj8n
(Eg: name of Farchy, Jack, Neil Hume, and Martin Sandbu. "Supply of
newspaper or full Copper Set to Outstrip Demand - FT.com." Financial Times.
website address) N.p., 9 Oct. 2013. Web. 15 Mar. 2014.
Date when the 16 april 2014
commentary was
written

Word Count 830

(750 words
maximum)

Area of the
syllabus your  Section 1: Microeconomics
commentary
 Section 2: Macroeconomics
relates to (please
tick the one which  Section 3: International Economics
is most relevant)
 Section 4: Development Economics

1
Supply of copper set to outstrip demand
By Jack Farchy, Neil Hume and Martin Sandbu
Leading copper miners and traders have said they expect supply to outstrip
demand next year as a wave of new projects begins production, a
development that suggests prices will continue falling for the benchmark
industrial metal.
The price of copper, used in electrical wiring, has fallen 30 per cent from
record highs in 2011 amid slowing Chinese demand and rising supply. (Extract
1)
The shift into surplus marks a dramatic change from market trends of the past
decade when surging Chinese growth combined with chronic mine
underperformance to drive copper prices higher. (Extract 2) The metal became
emblematic of the so-called “commodities supercycle” and triggered windfall
profits for miners such as Codelco and Freeport-McMoRan and major
exporters such as Chile, Peru and Zambia.
But Hernan de Solminihac, Chilean mining minister, predicted that next year
“prices will drop a little” because of an increase in supply, with new projects in
Chile, Peru, Indonesia and Mongolia all adding to global output. Thomas Keller,
chief executive of Codelco, the world’s largest copper miner, said he expected
the market to see “a small surplus as a number of new projects come into
production”.
The implication is likely to be lower copper prices, said Gu Liangmin, head of
copper at Minmetals, the Chinese state-owned mining and trading group. He
predicted that the metal would trade in a range of $6,500-$7,500 a tonne next
year, compared to current prices of $7,100, already down 10 per cent so far
this year.
The expectation of a shift into surplus in the copper market was echoed by
many of the traders, analysts and hedge fund managers assembled in London
for LME Week, the largest annual gathering of the metals and mining industry.
For the first time since 2008, investors polled by Macquarie did not pick copper
as their favourite metal for next year.
However, few expect a collapse in prices, as a recovering global economy lifts
copper demand. “The surplus we are forecasting is very modest,” Mr Keller of

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Codelco said, predicting a “really marginal” oversupply of 300,000-400,000
tonnes, compared to annual consumption of more than 20m tonnes.
“We should continue to see prices moving around current levels,” he said.
Indeed, not everyone believes that the oversupply will be long-lived: the
mining industry has a long record of under-delivering on promised production.
Mr de Solminihac said the trajectory for copper prices beyond next year would
depend on how much of the expected supply really materialises – a significant
uncertainty as miners review their spending plans.
Diego Hernández, chief executive of London-listed copper miner Antofagasta,
predicted that after two years of surplus in 2014 and 2015 the copper market
would return to a “tight supply-demand balance”. (Extract 3)
Last updated:October 9, 2013
http://www.ft.com/cms/s/0/d3b95c4c-30ff-11e3-b991-
00144feab7de.html#axzz2madUnj8n

3
Introduction
The article is about the expected increase of the supply of copper due to the recent opening
of new copper mines across the globe. As the demand for copper will not change with the
increase of supply, leading copper miners and traders expect the copper market to fall into a
“modest” surplus.

A market is a place where buyers and sellers interact to trade goods, services, for money or
barter.
In the case of a market failure, consumer and producer surplus are not equal, these two
factors are used to measure the total economic benefit of a trade. Consumer surplus is the
difference between what the consumer is willing to pay and what he actually pays. On the
other hand, producer surplus, difference between the price the producer sells and the cost
of supplying the good.
Demand and supply are two driving factors of the market economy, which determine the
price in a market. These factors work as following: if the demand for a good/service
increases and all other factors remain unchanged the price will increase “Ceterus paribus”
and vice versa. If the supply of a good/service increases and all factors of demand remain
unchanged the price will fall and vice versa. These are both movements up or down the
curves, but if the external factors change, such as consumer preference and economic
changes, the curves will shift to the left or right. This process of the market setting prices is
called the price mechanism.
A market equilibrium occurs when both consumers and producers have the same
‘satisfaction’ about the price of a good, this means that they both produce/consume at the
price they are willing to pay/sell.

Extract 1
“The price of copper, used in electrical wiring, has fallen 30 per cent from record highs in
2011 amid slowing Chinese demand and rising supply.”

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The price of copper peaked in February 2011 to US$10,100/ton1 the article states that the
price has fallen with 30% since. This amid with the slowing down of the Chinese demand
and increase in supply caused the market to fall into a surplus: ”That which remains when
use or need is satisfied, or when a limit is reached; excess; over plus”2. This surplus is shown
in fig 1.
FIG 1. Excess supply of copper
Price Equilibrium point S

Excess supply
S1

Pe
A
C B

P1
D1

Qe
Q2 Q1 Quantity

China is currently leading producer of copper across the globe. Recently its production has
increased even whilst its demand for copper has slowed down, this means that the quantity
supplied would increase from S->S1. A surplus is now created (the area between point A and
B) because the supply and demand curves don’t cross at the equilibrium point (A) anymore,
it has shifted to point C. this causes an excess of supply to occur. The copper miners would
need to drop their prices from P->P1 to achieve a market equilibrium again.

Extract 2

1"London Metal Exchange: Copper." London Metal Exchange:

Copper. N.p., 11 Apr. 2014. Web. 14 Apr. 2014.
2 https://www.boundless.com/economics/definition/surplus/

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“The shift into surplus marks a dramatic change from market trends of the past decade
when surging Chinese growth combined with chronic mine underperformance to drive
copper prices higher.”

The article states that, over the past decade, the copper production always had a shortage
of supply, this causing its market price to rise. The growing of the Chinese market along with
chronic mine underperformances has increased the demand. This results in a rise of input
costs for firms. As copper is in derived demand, the demand for a basic good( copper) that is
due to its use in the production of another good ( wiring), the input costs for example wiring
firms will increase. In fig2. Illustrates this excess demand (when the consumer’s demand for
a good exceeds the quantity supplied and available at given price and in a given time period)
and shortage of supply.
FIG 2. Excess demand of copper

price of S
copper Excess
Excess demand
demand S

P1 A
B
Pe
D2
D1

Qe Q2 Q1 Quantity of copper

This graph shows how the copper market operated for the past decade; there was excessive
demand for copper (in the area between A and B) due to mine shortage and mine failure,
“An economic shortage is a disparity between the amount demanded for a product or service
and the amount supplied in a market”, which means that the prices were driven up from the
equilibrium point (Pe) to P1.

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Extract 3
Diego Hernández, chief executive of London-listed copper miner Antofagasta, predicted
that after two years of surplus in 2014 and 2015 the copper market would return to a
“tight supply-demand balance”.
Even though there are new mines opening across the world, which will increase the supply
of copper, experts don’t expect a collapse in prices. The reason is that the copper market
has a history of not being able to produce the expected amount, due to mine
underperformances. As stated in the article Mr Hernández predicted that after two years of
surplus in 2014 and 2015 the copper market would return to a “tight supply-demand
balance”. This would mean that the speculations made in the article will not have a long run
effect on the copper market, and so the price mechanism will be normalized again over the
next two years. This is shown in figure 3.

Fig 3.Normalization of the copper market in the long run

Price
S
Of
copper Equilibrium point S1

Pe

P1

Qe Q1 Quantity of copper

In this graph the process is shown of the excess supply returning to market equilibrium by
shifting from S1 to S. This causes a market equilibrium to occur,” At the equilibrium price,
the quantity that buyers are willing to buy exactly matches the quantity that sellers are
willing to sell”, to occur.

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EVALUATION:

In the short run the speculations of the various copper mines and traders will have a
negative effect on the stakeholders, such as copper traders and miners and wiring firms and
,as there will be an excess of supply of copper. Although this means that the profits of
various copper mining firms and copper wiring firms will decrease in the short run, on the
other hand this excess supply will cause the consumer surplus to increase as the consumers
will consume the same good for a lower price than what they’re willing to pay. This low
copper price will also cause an increase of interest in copper futures market, as there will be
speculations that the copper price will rise again.
The impact of such change and in this case an increase in supply of copper resulting in price
fall affects the different stakeholders mentioned before differently. This is a speculation as
the commodities market can always be subject to unforeseen circumstances which affects
it’s prices significantly and therefore the price development is very hard to predict in the
long run.

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Bibliography

links
http://www.economicsonline.co.uk/Competitive_markets/Market_equilibrium.html
IB diploma Economics course companion

Investopedia.com