COPPER - THERMOMETER OF GLOBAL ECONOMY?

By Ruma Dubey

Copper, the ubiquitous reddish metal is all important. Being omnipresent all around us, this metal is stated to be the indicator of the true economic state. When the economy is booming, copper prices zoom and demand is high and vice versa when it is in recession.  The red metal goes under the moniker of “Dr Copper” given its ability as an economic forecaster and its price movements show shifts in the world economy.

Right from the cable which carries your electricity to the car which runs on the road, your laptops and PCs and mobile phones, construction and realty, all have copper. And given its wide usage unlike any other metal, it is thus considered to be the harbinger of economic sways. China consumes almost 40-50% of the global copper output and when imports to China spikes up, everyone assume that the best times have begun.

Thus every time there is talk of an economic recovery, eyes shift to copper – has the demand for the metal gone up to indicate this economic recovery?  Today, on the back of the EU summit expected to resolve the Euro debt crisis, the 3-month copper on the London Metal Exchange (LME) was up 2.2% at $7,545/tonne, its biggest daily rise since April 2012.  But YoY, the performance of copper in this current quarter could be its worst and it is down 11% on a YoY.

Eyebrows had shot up in May when China's copper imports had surged 65% on a YoY. Did that mean that recovery in a huge way was underway in the second largest economy of the world? Not really. This surge in May was China taking advantage of the low prices and stocking up on the metal for future use. With copper prices down almost 15% over the past 12 months, China felt that it was the best time to restock. This surge in imports which ideally should have heralded economic recovery was a misnomer in May. Infact ANZ Research put out a report stating that out of the 1.6 million metric tons of copper imported into China in Jan-May period, around 5,00,000 tons was in the warehouse.

Thanks to this, there are many who today feel that copper or for that matter, any commodity as such cannot become the indicator for economic activity. China has been taking advantage of the low price of many commodities and stocking up for later; so how can buying for restocking indicate economic recovery?. Many feel that automobiles demand and supply should be the true and first indicator while some feel that consumption of electricity should be the best indicator. But then again, in a country like India where there are power outages of over 6-8 hours every day, would that then be a true indicator? Or in a country like China where data is so sketchy and questionable, power consumption not does seem to be the right indicator. And if we go by automobiles then right now we are surely in a recessionary trend as many auto companies have started cutting down production due to low demand.

Can oil be a better indicator than copper? Not at all! There are too many speculative forces at work in oil. Any regional tension causes a spike up in oil prices and this one commodity is driven today entirely on sentiments. Thus it is not essentially the best indicator of a recovery. Yes, a sustainable spike up in oil prices would mean a recovery but by then, if one had kept track of copper, one might have got the whiff of this much before oil prices zoomed.

Yet, it would be too naïve to assume that only copper indicates a recovery. It is collectively all – electricity, automobile, money supply, oil and gold which give us a picture of the things to come. Copper alone was good enough as an indicator when 90% trading was physical and 10% was speculative. Today, this ratio has also undergone a change. More importantly, there are many cheaper substitutes coming for copper - aluminum and other alloys, optical fiber and wireless, and as this percentage goes up, copper might not rule the roost.

Yes, there is definitely a correlation between copper and economy but it alone is no longer the true barometer. But if we use that as an indicator for now, the news is not all that great as Australia`s Bureau of Resources and Energy Economics in a report said that copper may drop 11% this year amid weaker outlook for China and lower demand from Europe.

Copper, for a few more years for sure, will remain the industrial metal leader. There are substitutes but for them to replace copper will take some years. Till then, keep an eye on copper for some indication on the economy.