Thursday, January 15, 2015

What is Dr. Copper Signalling About the Economy

Updated February 19, 2015

In the past, the price of copper has been a meaningful indicator of economic and stock market health. Because copper is so ubiquitous in both industrial and residential applications, it is often regarded as an indicator that telegraphs where the economy may be headed.  As such, it is often referred to as "Dr. Copper" since, when the price of copper falls, it often signals an economic slowdown as we can see on this chart which clearly shows the price of copper dropping as the Great Recession took hold:

I'd like to open with a bit of background on the world's copper markets.  Here is a graph that shows world copper production since 1900:

Production reached 18.1 million tonnes in 2013, 3.8 million tonnes of which was extracted from low grade and sulphur ores by using leaching (solvent extraction or SX) and electrowinning (EW) processes, recovery techniques that did not exist before the 1960s.

Here is a look at the geographic distribution of copper production in 2013:

Latin American production of copper has surged from less than 750,000 tonnes annually in 1960 to 7.5 million tonnes in 2013, representing 42 percent of total worldwide copper production.  Chile is the world's largest mined copper producer followed by China, Peru, the United States, Australia and Russia as shown on this graphic:

In order to produce a metal from copper ore, it has to be smelted.  The copper concentrate that resuls from leaching the copper ore with ammonia or sulphuric acid is roasted or flash smelted to remove impurities and create refined copper that is 99.5 percent pure.  Here is a look at the geographic distribution of copper smelter production from 1990 to 2013:

Asia now accounts for 57 percent of the world's copper smelter production.

Here is a graphic showing copper smelter production by country for 2013:

In 2013, China accounted for over a third of the world's copper smelter production.  As of 2013, China has eight of the world's twenty largest copper smelting plants.  Copper's biggest market is in China and even a slight decline in Chinese demand for copper can impact its price.    

As we can see on this map which shows the flow of copper ores and concentrate, copper's biggest market is in China:

Here is a graphic showing refined copper usage by region for 1960, 1980 and 2013:

As of 2013, Asia's (mainly China's) demand for refined copper has expanded by over 500 percent.   This tells us that and even a slight decline in Chinese demand for copper can have a significant impact on copper's price. 

Like any other commodity, copper is traded on the world's markets, particularly the London Metal Exchange, The Shanghai Futures Exchange and the Commodity Exchange Division of the New York Mercantile Exchange (COMEX/NYMEX).  On the COMEX, copper is traded in lots of 25000 pounds and is quoted in US cents per pound.  Here is a chart showing the average annual copper prices in cents per pound (in red) and copper usage for the years from January 2001 to June 2014:

Now, let's look at more recent data from Kitco showing the five year spot copper price:

The price of copper hit a peak of $4.60 a pound back in early 2011 and has fallen since, however, if we focus on the tail of the curve, we see this:

Over the past six months, the price of copper has dropped from around $3.20 a pound to it current level of $2.60 a pound, the lowest price since mid-2009 as shown here:

Interestingly, if we look at the copper warehouse stock levels in London, the level is sitting just above a five year low as shown here:

After oil, copper is one of the world's most important commodities.  Production of copper is important to many economies around the world that, as in the case of oil producing economies, will be under increasing pressure as existing mines become sub-economic and mine expansions are shelved at current prices.  The copper market is just the latest casualty in what appears to be a significant correction in the world's commodity markets; in this case, copper may well be telegraphing a global economic contraction.

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