Term Paper

Of
Managerial
Economics
Analyse the demand and supply of copper in
India and the price, income and cross price
elasticity pertaining to that commodity.

Submitted to:- Submitted

by:-

Mr Baljeet Singh Karan Madan

Roll No : K27B1A26

Reg no :
3470070039
 ACKNOWLEDGEMENT

Apart from the efforts of me, the success of any project depends largely on the
encouragement and guidelines of many others. I take this opportunity to express my gratitude
to the people who have been instrumental in the successful completion of this project.

I would like to show my greatest appreciation to Mr Baljeet Singh. I can't say thank you
enough for his tremendous support and help. I feel motivated and encouraged every time I
attend his meeting. Without his encouragement and guidance this project would not have
materialized.

The guidance and support received from all the members who contributed and who are
contributing to this project, was vital for the success of the project. I am grateful for their
constant support and help.
Description

Copper is an element, reddish brown in color, having atomic number 29 and pertaining to the
scientific symbol ‘Cu’. Coming from the same family of silver and gold, this element shares
numerous common characteristics with those precious metals. This element is a highly
ductile and malleable element and a very good conductor of electricity. That is why it is
highly used in the electrical appliances as a thermal and electrical conductor and in building
wires. It occurs in various minerals on earth and is also forms part of a lot of alloys. Copper
also has characteristics that it is a creep and corrosion free metal and all of its so very useful
features make it an element on which the world’s economy directly depends.

Overview

Copper is a very important element and the oldest known commodity in the world that
directly affects the world’s economy. It stands at the third place in context of the world
consumption after steel and aluminum. It is largely used in electrical appliances, as it is the
cheapest metal, which is a good conductor of electricity. It is also considered safe as a raw
material in wire making. Alloys of copper like bronze, brass, monel and speculum metal are
also very popular and are extensively used throughout the world.

Copper is an element that has a universal availability and is found worldwide especially in
the volcanic areas possessing high levels of sulfur concentrations. In fact about 90% of the
world’s copper deposits are located in the great basin of the western United States, Zambia,
central Canada, the Andes region of Peru and Chile and some regions of Antarctica too! The
production of refined copper hovers around 15 million tons annually. The leading copper
producing nations are United States and Chile, both having 18% shares in the total world’s
production. The leading country in which copper is refined is United States of America. The
consumption of copper stands at the third position among the most consumed metals in the
world after steel and aluminum. The consumption of this metal is concentrated in the highly
industrialized countries namely

• Western Europe (29%)

• United States of America (19%)
• Japan (14%)
• Russia (10%)
• China (6%)

The percentage given above denotes the % consumption of the total world’s consumption.
The consumption trend is on a rise with the increasing contribution of the countries in Asia
like Japan, South Korea and Taiwan. There are various factors that influence the demand and
supply of copper in the world such as the technological, social and technological factors. This
is the demand for copper that governs the findings of new mines and the expansion of old
mines. Only 17% of the total copper produced in the world is available for trading. The major
copper exporting nations include
 • Chile
• Indonesia
• Canada
• Australia

The largest copper importing countries of the world includes

• Spain
• China
• Germany
• Philippines

History

The name copper is derived from the greek word ‘chalkos’. It is also related to the Greek
mythology as it is said that it was associated with the goddess Venus.

The origination of this oldest known metal, copper, is not exactly known to the human race
but it is estimated that it was discovered in around 9000BC in the middle east. A copper
locket had been found in Iraq that is around 8500 BC old. Smelting, one of the processes that
is used to refine copper, dates back to around 4500BC and the smelting sites were located in
the areas of present day Israel, Egypt and Jordan at that time. This metal was also used to
make weapons, hammers and axes. The people in Egypt discovered that by adding tin to
copper, the casting of the metal becomes easier. the metal was getting popular in the east
mainly in China and India. China started the process of hydrometallurgy in which a metal is
separated from its alloys. Indian people made various other crafts by using alloys of copper
like icons and lamps. The importance of this very useful metal was identified and it was so
extensively used that the respective era of history is named as The Bronze Age (2500BC-
600BC).

The inventions of new technologies in the east were adopted by whole of the world. It was
found that copper is a corrosion free substance and then it marked the invention of a new use
of copper-in plumbing systems and protecting wooden ships from algae. Ships of Christopher
Columbus too, use to have this copper guarding. With time, more and more new uses and
new techniques to extract copper were invented.

Copper coins have also played an important role in the history as a medium of currency. The
earliest instance found of copper being used as a currency was in the form of lumps in the 6th
century BC by the people of Italy. The shape of copper lumps were molded to coins with the
invention of new copper alloys. Rulers like Julius Caesar and Octavianus use to have their
own coins having their own symbols. This shows that copper has ever been a prominent
contributor to the all of the various aspects of history, culture, technology and medicine and
is still used extensively.
Copper producing countries

Copper is extracted from its ore that is mineral form such as sulfides and carbonates.
Although copper ore is found throughout the world, the major countries that produce copper
ore are

• Chile
• United States of America
• Canada
• Russia
• Zambia
• China
• Poland
• Zaire
• Indonesia
• Australia
• Peru
• Kazakhstan
• Mexico
• Argentina
• Brazil
• Korea
• Iran
• Mongolia
• Saudi Arabia
• Sweden

The ore mines are located both on land as well as in the deep seas and it is estimated that the
total world resources of copper account to around 2.3 billion tons. The total production of
refined copper in the world figures up to 15 million tons. The maximum share in this
production figure is constituted by Chile and United States contributing to 18% each. Canada,
Russia and Zambia follow Chile and United States with 8%, 7% and 5% share respectively.
Copper can also be extracted from its waste scrap and it contributes to a large extent in the
world’s total production. The major sources of copper scrap are United States of America and
European Union. The refining process of ore of copper is complicated and may not be done at
the place of production. The following are the eight leading ore refining countries, which
account for around 67% of the total refined copper production

• United States
• Russia
• Japan
• Chile
• Canada
• Zambia
• Belgium
 • Federal Republic of Germany

Production of copper in India

India is not a major producer of copper ore but it produces the refined form of copper. It
contributes to about 3.5 to 4% of the world’s total production of copper that sums up to a
figure of 6 lakh tons. India is indulged in importing copper ores from the ore exporting
countries of the world and extract copper out of them as there is a shortage of copper mines in
the country. The production of copper in India is dependent on these imports only. Three
companies in India largely handle production of copper from its ore. They are

• Birla copper
• Sterlite Industries
• Hindustan Copper ltd

Among these three countries, Hindustan Copper ltd forms part of the Indian public sector and
the other two belongs to the private sector.

However, small quantities of copper that is produced in India are extracted from the copper
mines situated at Khetri and Malanjkhand areas of the country.

Indian copper market

India does not provide a big market for copper. Due to shortage of copper mines and a low
percentage of productivity of copper in the mines, India suffers a loss in the level of
production and it has to completely depend on the copper ore imports. Also, not many
companies are indulged in the refining and extraction of copper from its alloys and ores.

India produces copper from the imported copper ore that accounts to around 6 lakh tons of
production. This production level is contributes to a mere 4% share in the total copper
production in the world. Indian market is divided into three parts i.e. primary and secondary.
Primary segment comprises of the producers that convert copper ore into refined copper.
Three companies namely Hindustan Copper ltd, Birla Copper and Sterlite Industries
constitute this primary segment. Secondary segment comprises the producers that
manufacture value added products made from copper like wires, foil etc.

The domestic consumption demand of copper is around 5.5 lakh tons in the country. A major
percentage i.e. 10% of the total consumption in India is contributed by the two major tele-
communication providers namely BSNL and MTNL. The rest of the demand is contributed
by the construction and automobile sector.

India has always been an importer of copper ore to satisfy the domestic consumption demand.
The countries from the ore is imported into India are

• Chile
• Indonesia
 • Australia
• Canada

But, due to the rise in the production of the three major players in the Indian market, the
country is now emerging as a net exporter. The production of copper has significantly during
the last few years that has enabled India not only to satisfy it is own domestic demand but
export refined copper in small quantities. The prices of copper in Indian market are highly
dependent on the prices in London Metal Exchange.

Market Influencing Factors

• Price fluctuations of copper in London Metal Exchange

• Production level of copper in the world
• Growth prospects of the major copper consuming countries of the world
• Growth prospects of the various consuming sectors in the market

Major trading centers of copper

Copper is an important commodity that is traded mainly in

• London Metals Exchange (London)
• New York Mercantile Exchange (New York)
• Shanghai Futures Exchange (China)

These commodity exchanges direct the world market in the context of prices.

In India, copper is traded in the commodity exchanges namely Multi Commodity Exchange
of India ltd, National Multi Commodity Exchange of India and National Commodity and
Derivatives Exchange.
Market for Copper

The market for copper has hit the headlines in the last two years as a price boom has
occurred.

The world price of copper nearly trebled between the start of 2005 and the summer of 2006,
one of the most remarkable booms in commodity markets in many years. Much of the steep
rise in price has been due to demand-side factors. World demand for copper has been rising
much faster than the growth in market supply that result from new discoveries of copper and
increased extraction rates of known reserves. In 2004, world copper consumption exceeded
production by 843,000 tons and a similar demand-supply imbalance occurred in 2005 and the
early months of 2006.

According to a recent study from geologists at Yale University, new discoveries of copper
have raised global reserves by just 0.63 per cent a year since 1925 but usage (final demand)
has risen at 3.3 per cent per annum. And now demand is growing strongly on the back of
phenomenal growth in China, India and other emerging market economies. Stocks of copper
have been in sharp decline in the last few years and it is this scarcity that has driven prices
higher as commodities traders out-bid each other as they scramble for available supplies.
Supply has fallen behind the growth of demand and prices can move in only one direction
when this happens!

The world supply of and demand for copper

Most copper ore is mined or extracted as copper sulfides from large open pit mines in copper
porphyry deposits that contain 0.4 to 1.0 percent copper. Over 40 per cent of world copper
supply comes from North and South America; 31 per cent from Asia and 21 per cent from
Europe. Chile is the world’s biggest supplier of copper (it provided 35 per cent of the total in
2003 with Indonesia and the USA each contributing 8 per cent).

Copper – an example of derived demand

Because copper is malleable and ductile, there is a huge industrial demand for copper. Like
most metals the demand for it is derived in part from the final demand for products that use
copper as an important component or raw material. Nearly 50 per cent of the demand for
copper comes from the construction industry, and 17 per cent is from the electrical sector.
Copper is also used extensively in heavy and light engineering and in transport industries.
From copper wire to copper plumbing, from the use of copper in integrated circuits to its
value as a corrosive resistant material in shipbuilding and as a component of coins, cutlery
and to colour glass, copper has a huge array of possible industrial uses.

A good example of where demand for copper comes from is the automobile industry. The
average new car contains 27.6kg of copper. And hybrid cars which incorporate electric
motors in conjunction with combustion engines could lead to further rises in copper demand.
A typical electric hybrid car might use around 2 times the current usage of copper in extra
cabling and windings for electric motors."

Incremental demand – the China and India effect

Recent data suggests that the incremental growth in world demand for copper has come
almost exclusively from China and other Asian economies. HSBC analysts calculate that
between the years 2000-04, the compound annual growth in copper consumption from North
America has fallen by 3 per cent and by 1.8 per cent from Western Europe and 2 per cent
from Japan. In contrast, demand from Asian countries other than Japan has increased by 8.6
per cent each year whilst in China the growth has been a staggering 15 per cent per year.

There has also been a noticeable speculative demand for copper as investment funds around
the world have started to track commodity prices. In the case of copper, thus far, the market
has been a one way street for financial investors, although you may have heard about the
rogue copper trader from China who a fortune betting that the market price of copper would
fall back in November 2005!

The volatility of commodity prices

As we have seen, price volatility stems from a lack of responsiveness of both demand and
supply in the short term, i.e. both demand and supply are assumed to be inelastic in response
to price movements.

The low price elasticity of demand for copper usually stems from a lack of close
substitutes in the market. For some products and processes, aluminium or plastic may
act as a substitute to copper for some uses, but there are costs and delays involved in
switching between them.

The elasticity of supply is also low. Supply is usually unresponsive to price movements in the
short term because of the high fixed costs of developing new extraction plants which also
involve lengthy lead-times. If existing copper mining businesses are working close to their
current capacity then a rise in world demand will simple lead to a reduction in available
stocks. And as stocks fall, so buyers in the market will bid up the price either to finance
immediate delivery (the spot price) or to guarantee delivery of copper in the future (reflected
in the futures price). It can take huge price swings in the market for supply and demand to
respond sufficient to bring the market back to some sort of equilibrium.

The effects of rising copper prices

The demand for copper will continue to remain strong provided that the global industrial
sectors continue to expand production. But if price remain high then we can expect to see
some shifts occurring. For a start, copper can be recycled although the costs of doing so are
often high and there are fears concerning the negative externalities arising from the pollution
created by trying to recycle used copper. These external costs include atmospheric emissions
from recycling plants and waste products dumped into rivers. Nonetheless price theory would
predict an increase in demand for scrapped copper and perhaps a substitution effect away
from copper towards aluminium. And in the medium term high prices and emerging new
technologies may cause an even bigger shift in demand away from copper based products.
Plastics provide lower material and installation costs for businesses. And the take off in
wireless technology and fibre optics will also have an impact.

And higher prices might also be the stimulus required for an expansion of copper ore
production as supply responds to the incentives of increased potential revenues and profits. In
recent years, copper mining production has fallen short of expectations. But as with any
market, if the price is high enough suppliers will eventually respond!

Factors Influencing Copper Markets

• Copper prices in India are fixed on the basis of the rates that rule on LME the
preceding day.

• World copper mine production through exploration of new mine and expansion of
existing mine.

• Economic growth of the major consuming countries such as China, Japan, Germany
etc.

• Growth and development in the Building, electronics and electrical industry

Indian Scenario

• The size of Indian Copper Industry is around 4 lakh tons, which as percentage of
world copper market is 3 %.

• Birla Copper, Sterilite Industries are two major private producers and Hindustan
Copper Ltd the public sector producers.

• India is emerging as net exporter of copper from the status of net importer on account
of rise in production by three companies.

• Copper goes into various usage such as Building, Cabling for power and
telecommunications, Automobiles etc. Two major states owned telecommunications
service providers; BSNL and MTNL consume 10% of country's copper production.
Growth in the building construction and automobile sector would keep demand of
copper high.
Global Scenario

• Economic, technological and societal factors influence the supply and demand of
copper. As society's need for copper increases, new mines and plants are introduced
and existing ones expanded.

• Land-based resources are estimated at 1.6 billion tons of copper, and resources in
deep-sea nodules are estimated at 0.7 billion tons.

• The global production of refined copper is around 15 million tons

• The major copper-consuming nations are Western Europe (28.5%), the United States
(19.1%), Japan (14%), and China (5.3%).

• Copper and copper alloy scrap composes a significant share of the world's supply.

• The largest international sources for scrap are the United States and Europe. Chile,
Indonesia, Canada and Australia are the major exporters and Japan, Spain, China,
Germany and Philippines are the major importers.

References

http://www.crnindia.com/commodity/copper.html

http://tutor2u.net/economics/revision-notes/as-markets-crossprice-elasticity-of-
demand.html