Factors affecting supply and demand of copper

Question:

Discuss about the Demand and Supply of Copper in the Australian Market.

Demand and supply of certain resources can determine the pricing of that particular resource in any given marketplace. Fundamentally, due to shift in demand and supply of a specific commodity, prices may seem to have fluctuated. However, there are a number of factors that can affect the entire supply and demand status of a commodity (Krugman and Wells, 2013). The identified study paper has been developed to discuss how supply and demand scenario of copper has affected the price of the commodity in the Australian market. Precisely, the surging demand for copper in the Australian market and its impact on the copper miners and investors has been discussed throughout the study.

According to the article written by McHugh (2017), the increasing demand for electric vehicles (EV) and renewable energy is driving the demand of copper in the Australian market. Similarly, by following the fundamentals of economies, surging demand of the red metal is boosting the prices of the commodity. Meanwhile, the rising demand of the metal spells great news for the miners as well as the investors involved in the Australian copper mining industry (Schlesinger, 2014). As per the market analysis, the study evaluates some of the strategies to be followed by the major players attached to the industry.

The transformation around the global automobile industry has brought a significant boost for the copper industry. As the popularity of electric vehicles is rising day by day, the demand for the red metal is surging as well. Evidently, the rotary motors used in EVs can use up to 4 times the amount of copper than conventional combustion automobile engines (McHugh, 2017).  Therefore, increased demand for EVs can create a massive demand for copper as consumption of the red metal will be higher in the automobile industry. Apart from that, to run the EVs and develop the charging infrastructure, the role of copper is huge. Besides, the development of renewable energy sector has also contributed towards the surge in demand for the commodity (McHugh, 2017). In order to generate renewable energy, the requirement of copper will be four times greater than the coal-powered energy plants. By following the recent trend, the consumption of copper will be higher leading to demand growth of the commodity.

Currently, the market for copper requires 26 million tonne per year whereas the demand for copper is expected to reach 40 million tonne per annum by 2030. Clearly, the increased demand for copper has been a positive sign for the copper miners and investors. The price of copper on the London Metal Exchange is increased to US$6,367 per tonne from US$5,633 per tonne in May (McHugh, 2017). However, such massive demand for copper can create a scarcity of the resource if the supply-demand side of the red metal cannot be maintained properly. At the same point in time, a sudden rise in demand for copper may lead to the high price of the commodity affecting the market equilibrium price of the red metal (Hoog, Handberg and Jegatheesan, 2015). Therefore, the supply side of copper must be improved to control the massive price surge of the commodity. In the underlying section, the effect of the high demand for the commodity on the prices has been described using the theoretical concept of supply and demand.

Impact of demand for copper in electric vehicle and renewable energy sectors

On the basis of the above analysis, it can be seen that the rising demand for the copper is the primary reason for the rise in the price of the metal that will further impact the cost of production of the automobile industry (Shao, Pipattanasomporn and Rahman, 2012). Moreover, it is expected that the price of the electric vehicles will increase in the upcoming future with the rise in the price of the red metal. A figure has been presented herein below for further understanding:

Figure: Shift in demand and price of a commodity

Source: (Forstater, 2017)

As per the above diagram, it can be seen that the quantity demanded for copper is rising in the Australian as well as in the global market due to increased use of the metal in the manufacturing of electric vehicles or renewable energy devices. Due to the increase in the demand, a rightward shift in the demand curve can be evident in the market from D to D’. However, the supply of the commodity remains constant at S, resulting in a rise in the quantity demanded from q to q’. Furthermore, a shift in the market equilibrium can be evident that further results in an increase in the price of the red metal from p to p’. According to Samuelson and Nordhaus (2015), the price elasticity of copper is inelastic in nature, which leads to a relatively lesser fall in the quantity demanded as compared to the rise in the price. A figure has been presented herein below for further consideration:

Figure: Inelastic demand for copper

Source: (Samuelson and Nordhaus, 2015)

On the basis of the above figure, it can be seen that the price of copper increases by 100 percent, whereas the quantity demanded falls by only 20 percent. Hence, copper has an inelastic price elasticity of demand. A high level of increase in the price of the red metal will lead to shortage in the supply of the product in the upcoming future (Shao, Pipattanasomporn and Rahman, 2012). It is important for the government and the policy makers to control the supply of copper in the future to reduce the chances of tremendous increase in the price of the commodity. Firstly, it is recommended to the government to discover new resources of copper to increase the supply and control the increasing price of the commodity (Bouchentouf, 2011). Secondly, the government must introduce a price ceiling policy to monitor and control the price of the red mental to maintain equilibrium in the metal and automobile market.

Conclusion

By considering the above analysis, the increase in the demand for copper in the manufacturing of electric vehicles and electric power charging stations has led to a tremendous increase in the price of the commodity. It is expected that the rise in the demand will further led to a shortage in the supply of the red metal in the future due to inelastic demand of the commodity. Hence, it is recommended to the government to discover new reserves of copper to stabilise the supply of the commodity in the future and use a price ceiling policy to control the increasing price of the metal in the Australian market.

References

Bouchentouf, A. (2011). Commodities for dummies. 3rd ed. Hoboken, NJ: Wiley Pub.

Forstater, M. (2017). Economics. 5th ed. London: A. & C. Black.

Hoog, J., Handberg, K. and Jegatheesan, R. (2015). The role of electric vehicles in demand response: implementation, network impacts and market requirements. International Journal of Electric and Hybrid Vehicles, 7(3), p.250.

Krugman, P. and Wells, R. (2013). Economics. 2nd ed. New York, NY: Worth Publishers.

McHugh, B. (2017). Copper demand up due to surge in electric vehicles and renewable energy targets. [online] ABC Rural. Available at: https://www.abc.net.au/news/rural/2017-08-15/copper-demand-and-price-up-on-electric-vehicle-demand/8799106 [Accessed Nov. 2017].

Samuelson, P. and Nordhaus, W. (2015). Economics. 4th ed. Boston: McGraw-Hill/Irwin.

Schlesinger, B. (2014). Electric Vehicles: Electric Vehicles May Reduce Oil Imports While Stabilizing Grid. Natural Gas & Electricity, 30(8), pp.18-22.

Shao, S., Pipattanasomporn, M. and Rahman, S. (2012). Grid Integration of Electric Vehicles and Demand Response With Customer Choice. IEEE Transactions on Smart Grid, 3(1), pp.543-550.