Copper has joined the base metals pack in its tumble. The metal is called Dr Copper as it is believed to forecast the world’s economic health. Judging by its volatility, it seems it is unable to make up its mind.

Last week, the International Monetary Fund released its World Economic Outlook report. It painted a gloomy picture for the developed world’s economic prospects. But it sounded a somewhat optimistic outlook for base metals, based upon China’s relatively higher economic growth.

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What changed in a week to cause this sharp decline in copper prices? One reason is fears that the situation in Europe is going from bad to worse, and news from the US does not suggest it can a stem a slide in Europe, if that happens. Another reason may have been comments from large miners that some of their customers were delaying deliveries. And there may also be forced liquidation.

Investors may have decided to first sell and then assess. China will be central to this assessment. In 2011, Xstrata Plc expects the country to account for about half of the global demand growth, according to a recent investor presentation. The copper producer also sees a recovery in demand in China, higher copper cathode imports in July and August, lower inventory, and tightening availability of copper scrap. End-use markets in China have grown throughout 2011.

Xstrata also says that demand in western markets has improved, despite economic uncertainty. But the volatility in the region means this may change any time. The company recognizes the risks to copper demand in the US and Europe, but it expects demand from developing markets will balance the market.

Moreover, global copper supply in 2011 is expected to rise by only about 2%, half of the anticipated demand growth. Next year, supply will increase but not enough to cause a surplus. And if prices fall, then producers may postpone start-up of plants to keep supply in check. The balance seems to favour producers.

What does all this mean for India? The only integrated producer of copper is the public sector unit, Hindustan Copper Ltd. The stock is understandably feeling the heat and has fallen by 8% in a week and threatens to send the government’s proposed disinvestment in it into cold storage again.

The two other large copper producers—Hindalco Industries Ltd and Sterlite Industries India Ltd—run custom smelters, buying copper concentrate from miners to process it into copper cathodes and downstream products. Their profits do not fluctuate with copper prices, but depend on treatment and refining charges that have improved in recent quarters.

In the longer term, their fear would be lower availability of copper concentrate, if miners cut production in response to falling realizations. That may lead to lower treatment and refining charges, as miners will get an upper hand.

But this risk will play out over the medium to long term. Still, these two companies’ shares fell on Monday. That is because they produce other non-ferrous metals, such as aluminium and zinc.

While the physical market for copper still appears strong, volatility may continue due to investor nervousness. All eyes should be on China’s economy. A spell of economic weakness there will prolong copper’s woes.

Graphic by Naveen Kumar Saini and Ahmed Raza Khan/Mint