Hunting for clues to the health of the global economy? It might be time to see the doctor. Market participants have tagged the moniker "Dr. Copper" onto this widely used industrial metal, which has a reputation for historically presaging global economic growth trends.
"Copper is reputed to have earned a Ph.D. in economics because of its ability to predict turning points in the global economy," says Jodie Gunzberg, global head of commodities at S&P Dow Jones Indices.
That’s because copper is widely used in a number of manufacturing and building applications across industries. Demand for copper can be a proxy for rising and falling economic activity. Here's the cheat sheet:
- Rising demand for copper, which often accompanies rising prices for the metal, can signal improving global growth trends.
- Declining copper prices may indicate sluggish industrial demand and a pending economic slowdown.
Recent Market Action
A variety of factors pressured copper this spring and early summer (see figure 1), including a rising trend in the U.S. dollar (most commodities have an inverse relationship to the dollar) as U.S. interest rates are expected to gap ahead of their global counterparts. Pile on concerns about Chinese demand amid that country’s weakening economic growth prospects, plus Greece-sparked growth uncertainty in the eurozone.
Was Dr. Copper offering clues last spring? In July, the International Monetary Fund (IMF) revised its expected 2015 global growth forecast down to 3.3% from 3.5%.
Copper has many industrial applications due to its malleability, ability to conduct heat and electricity, and resistance to corrosion. Copper’s demand relates to wiring and plumbing in construction, heating and cooling systems, electronic products, and autos.
The metal plays a big part—and is heavily weighted—in global commodity market indices.
"Copper is the biggest metal in commodity indices [because it has] a greater world production and liquidity than any other metal. It comprises about 10.5% of the Dow Jones Commodity Index [DJCI] and just over 3% of the S&P GSCI,” Gunzberg says.
Copper may also be useful in tracking inflation trends.
"Copper returns are positively correlated to both expected and unexpected inflation, though the correlation to unexpected inflation is more significant," Gunzberg says.
Chile is the world's largest copper producer, with China, Peru, the U.S., and Australia also home to copper mining facilities. On the demand side, China has a voracious appetite for the industrial metal. China’s demand for refined copper is about twice that of Europe, and roughly four times more than the U.S., according to Gunzberg.
"Chinese economic growth is important to copper. However, on a per capita basis, Chinese consumption of copper is still only about half of North American consumption. This makes copper particularly likely to increase with increases in Chinese demand," Gunzberg says.
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