If you want to check up on the health of the global economy, you need look no further than the copper industry. Copper has long been held as the global barometer for economic health, and the forces that govern copper prices are the very same that drive financial currents around the world. Its primary usage is found in manufacturing and construction, accounting for more than twice the amount used in electrical wiring.
This year, copper has led investors on a bit of a goose chase. Earlier in the year, it looked as if equities were finally in retreat and commodities were coming back. By March, though, the stock market was in full recovery and copper began to head back south. Year to date, copper is officially up 4.65%, but there’s a lot going on in the industrial metal to which investors should be paying attention.
Yellow Alert for Copper and the Economy
China has long been the catalyst for commodities and copper is no exception. China is the world’s largest copper consumer, making up 40% of the total global demand. In addition, improving economic data has helped boost copper prices – at least temporarily. But many analysts are doubting the strength behind China’s numbers, and the market seems to have pulled back, patiently waiting to see how the numbers will play over the long term. Still, positive news in Chinese manufacturing and housing boosted imports of copper in March to a record 570,000 tons, up 39% year over year. Only time will tell if the trend continues.
Other headwinds that copper faces includes a relatively weak European economy and a falling U.S. dollar, which is also dragging other commodities lower. Last year, copper producers like Freeport-McMoRan cut production in the midst of a weak commodity environment.
Interestingly, while copper itself has been struggling, copper-based mining stocks have been thriving – they are up an average 40% year to date. And while copper has slipped somewhat in the past week, it doesn’t show any signs of a bearish reversal. Rather, it looks like copper is content to simply sit and wait for investors to make up their minds about where it should go.
The Bottom Line
Copper prices will likely be tied to China’s economy for the foreseeable future, but other developments could take over as the primary bullish catalyst. India is quickly becoming the next great global economic powerhouse, and higher manufacturing figures mean a bigger demand for industrial metals such as copper. If the domestic economy improves more than expected, that could also boost copper values.
The production cut by copper miners last year could translate into a supply shortage if demand rises faster than expected. It would take some time for mining companies to fully bring facilities back online – in the meantime, copper prices could see a rally. Still, until we see further evidence of where the global economy is headed, copper prices should continue to trade flat.