Wednesday, November 18, 2015

Where is the Global Economy Headed?

Updated November 23, 2015

When we want to have a better understanding of where the global economy is headed, it is most advantageous to look at a leading indicator that has a long history of providing us information about the health of the global economy before it happens.  For decades, analysts have used the price of copper to provide that insight, leading to the moniker "Dr. Copper" since the demand for the commodity has closely tracked the health of the economy.  Since the use of copper is pretty much ubiquitous throughout the economy,(i.e. for electronics, per generation, housing etcetera), demand for the metal has generally increased during economic expansions which has pushed the price higher, and fallen during economic contractions, pushing the price lower.

Let's look at a chart that shows the price of copper on the COMEX since 2006:

At just over $2.06 a pound, copper is trading at its lowest level since the Great Recession and less than half of its peak price seen in 2010 and 2011. 

Let's look at Kitco's five year spot copper chart:

Focussing on the tail of the chart, this is what we see:

In the last thirty days, the spot price of copper has dropped from a high of $2.39 per pound to $2.06 a pound, a drop of 13.81 percent in one month.

This graph may help to explain why copper prices have dropped:

In both 2012 and 2013, the growth in copper supply (dark blue) outstripped the growth in copper demand (light blue) and, since 2013, the annual growth in copper demand has dropped from 3.3 percent to 2.7 percent in 2014 and 2.1 percent in 2015. 

Here is a graph showing how the total copper demand in the United States has changed over the past decade and a half:

Since the Great Recession, despite the improvements in the economy, the demand for copper in the United States has pretty much flat-lined.

China accounts for about 45 percent of the world's demand for copper.   According to the International Copper Study Group (ICSG), the refined copper market was roughly in supply-demand balance in July 2015, however, world usage had declined by around 2 percent on a year-over-year basis.  On a year-over-year basis, China's demand did increase by a very small 1 percent while usage in Japan declined by 8 percent and the EU by 6 percent.  Usage in Russia declined by a significant 52 percent following the withdrawal of Russia's cathode export tax in September 2014.  On the other side of the ledger, world mine production of copper rose by 3 percent in the first seven months of 2015 compared to 2014.   World refined copper production rose by 2.5 percent in the first seven months of 2015 when compared to the same period in 2014.  If we look at this forecast from ICSG, we can clearly see that global copper usage is expected to drop by 1.2 percent from 2014 to 2015 with China showing flat consumption in 2014 and 2015 with slight growth in 2016:

With China consuming nearly half of the world's copper, it is no wonder that the price of copper has been under downward pressure.

Interestingly, in a recent Marketwatch article entitled "Why copper can't reclaim its role as a leading indicator", the author quotes Robert Barone of Concert Wealth Management who stated that copper went from "Ph.D. to deadbeat" and that while, during the pre-Great Recession years, there was a strong correlation between economic growth and the demand for copper and increases in its price, that that relationship has changed because copper is functioning like many other base commodities whose price has dropped while stock prices, particularly in the United States, have continued to rise.  I wonder if Mr. Barone has given any thought to the idea that the unprecedented actions by the Federal Reserve and its massive expansion of the monetary base since 2008 have created what could turn out to be a very significant bubble in equities and that copper is still predicting what will happen to the American/global economy?  We've heard the old song that "things are different now" before and, as it turns out, things really aren't different at all.

Only time will tell whether copper has lost its ability to foretell what lies ahead for the economy, however, my instincts tell me that copper is still forewarning us that the global economy is in for a rather rough ride. 


  1. I have said this several times but we have never left the great recession. History will look back at double seasonally made up numbers and the inflated stock market and this whole time period will be one of a depression during which leaders propped up all sorts of data to make things seem much better then they really are.

  2. Agree, Anonymous. The Great Recession never ended for the 99%.