The price of copper says a lot about the health of the global economy. And right now it’s saying that things look bad – for China in particular.
Copper is one of the most widely used metals on the planet. It’s part of almost anything that uses electricity: apartments, cars, machinery, airports, kitchen appliances, and wires. It’s a foundation of modern society – and for that reason “Doctor” copper is a good indicator of turning points in global economic health.
Along with many other metals, copper has had a bad run. It’s trading close to six-year lows, at just below $4,600/metric ton. It’s dropped 28% in 2015 so far, and 11% in the past month alone. It’s down 55% from all-time highs in February 2011.
That’s a bad sign. Less demand for one of the key ingredients of modern civilization means that fewer people are building and producing and manufacturing.
It’s more alarming because copper is closely linked to economic growth in China, which accounts for nearly half of world copper demand.
Historically, dividing the price of copper (it’s priced in U.S. dollars per metric ton) by 1,000 has yielded a figure that’s close to China’s economic growth. For example, in the second quarter of 2011, copper was trading at just under $9,100/ton – while China’s GDP growth was at 9.9%. That relationship has generally held up in recent years.
The current price of copper implies that China’s economic growth is closer to 4.5-5%, instead of the 6.9% in the third quarter of 2015 that the Chinese government reported. That’s a big difference, and no one knows whether Dr. Copper, or the Chinese government, is closer to the truth.
Copper prices are probably going to fall further. China’s ongoing economic slowdown (especially if economic growth is closer to what Dr. Copper suggests, than to the 6.5 – 7% growth the government is aiming for) will lead to even lower prices.
It doesn’t help that last month the head of Codelco, the world’s largest copper producer, said the company would not cut production in response to lower prices. That means the supply of copper on the market won’t go down. Oversupply is a big problem for all metals, and for mining companies.
Also hurting the price of copper is strength in the U.S. dollar. Commodities are priced in U.S. dollars, so the price of commodities in local currency terms is higher, when the dollar rises. Higher prices hurt demand.
Doctor Copper hit a low of around $3,000 a ton during the global economic crisis. That’s another drop of more than 50% from current levels.
It probably won’t go that far. But Doctor Copper is worth watching closely. A sharp drop in the price of copper could reflect underlying weakness in the Chinese economy that official statistics don’t show. And weakness in the Chinese economy could quickly spook investors – in China and everywhere else.