The Impact of Structure Change on Copper Prices

"This paper characterizes quarterly LME copper price fundamentals from 1995 to 2011 by analyzing the transformation of the market mechanism based on structural change perspective. Using chow test for structural change based on the least square multiple regression, we divide the price fluctuation into: Stable price period (1995Q3-1999Q2), Low stable price period (1999Q3 – 2003Q3) and Price fluctuation period (2003Q4 – 2011Q2). The results show the existence of structural breaks disproves the investigation of the full sample period as a whole. In different structural breakpoints the main drivers of copper prices changes and their impact are significantly different. Moreover, the paper examines the role of speculation in copper price fluctuations.Introduction The rise in commodities price volatility and financial and economic crisis have led to questions over the organisation of futures and physical commodities markets. Spikes in commodity prices and volatility have coincided with a surge in financial speculators in the commodity markets inspiring a polarised and hotly debate among academics and practitioners about the role of investors in the development of physical markets. In his seminal work Kaldor (1939) focused primarily on whether speculative activity in the futures markets reduces the variance of commodity spot prices. Yet, part of the literature finds that the introduction of futures contracts destabilizes the spot market. IMF (2006) studied commodities boom and its causes concluding that there is little support for the hypothesis that speculative activity affects either price levels over the long run or price swings in the short-run. The impact of speculative activity on commodity prices remains a highly contentious topic. Other market analysts take the view that the supply and demand for physical commodities remain the major determinants of market trends (Krugman 2008). It is the aim of this study to contribute to the literature by examining the drivers of copper price changes from a structural change perspective. In this context we are attempting to answer to: What are the main drivers leading to copper price fluctuations? Are these factors having the same effect in different periods or not? It is meaningful to understand drivers of copper prices and thereby, their fluctuations because it will help developing countries depending on copper export to anticipate market situation and avoid bad economic development challenges that can result from price fluctuations. Moreover, this can ensure sustainable mineral supply."