FINANCE AND COMMODITIES

Copper in a Hybrid Physical-Investment Market

TABLE OF CONTENTS

CHAPTER 1: INTRODUCTION3

Problem Statement3

Purpose of the study4

Importance of the study4

Scope of the study6

Rationale of the study7

Definition of terms9

Overview9

CHAPTER 2: LITERATURE REVIEW11

CHAPTER 3: METHODOLOGY16

Approach16

Data Gathering Method16

Database of Study16

Validity of Data17

Originality & Limitations17

Summary18

REFERENCES19

CHAPTER 1: INTRODUCTION

Problem Statement

As the third most widely used metal in the world (after iron (1st) and aluminium (2nd)), copper is used in the electrical and construction industry sectors. There are two stages from the ore to final product, namely production which involves mining, smelting and refining, followed by fabrication, which is using the refined cathode copper and wire for various products. . (Alba, 2009, pp. 99-114)

Due to it being a very highly efficient conductor of heat and electricity, copper has huge demand in the electrical and construction sectors. Copper is a malleable metal and has good resistance to corrosion and so has applications in alloys such as brass, and is used to make metal objects of varying shape. Copper is very important in global markets and its price is quite responsive to world events. (Erdem, 2001, pp. 445-57)

Over the longer term the emerging economies look set to continue demanding more grade A copper for economic expansion. And with investment and pension funds looking to include a broad range of commodities in diversified portfolios, one can expect to see growing attention to the metals market in general and to copper futures in particular. As a result LME traded copper futures, as a physical contract, is a very important hedging management tool for producers and consumers as well as a vehicle for speculative investment. Lot sizes are 25 tonnes with a +/- 2% margin and the copper must be grade A cathodes which conform to BSEN 1978:1998 (an European Standard specifying the properties, composition and tolerances for copper rods for general use.)

The copper contract on the London Metal Exchange (LME) accounts for over 90 percent of total copper futures activity. It represents a lot size of 25 tons. Because the LME is located in the United Kingdom, it is regulated by the British Financial Services Authority (FSA). Another good investment vehicle is to get involved in companies that specialize in mining and processing copper ore. The companies listed here are leaders in their industry and are involved in all aspects of the copper supply chain. The only drawback of investing in companies is that you don't get direct exposure to the price fluctuations of the metals. Still, they're a good option if you don't want to venture into the futures markets. The high grade copper futures contract, called copper grade A, is the second largest contract traded on the London Metal Exchange, regarded as the world benchmark exchange for copper pricing. (Emery, 2000, pp. 98-111)

The exchanges set a daily price and also quotations for the future transactions, which offers an interesting scenario to negotiate contracts and buying options on copper lots. In London, copper is traded in dollars and in lots of 25 tons; in New York, trades are made on the basis ...