DR.COPPER CALLS IN SICK

By Ruma Dubey

Yesterday’s Cover Feature was about rising price of gold – any global uncertainty causes gold prices to rise and this time, it is accompanied with a falling oil price.

Today, we are looking at another metal, Copper, which in many ways is also a barometer of the economy. Gold rises in global turmoil and copper falls. That’s the direct correlation between the two metals.

Copper prices plunged to their lowest level in more than five years yesterday due to falling oil prices. The price on LME went as low as $ $5353.25 a ton, a price level last seen in July 2009. Reacting to this, on the Indian bourses Sesa Sterlite and Hindalco fell yesterday and today too, there are the top losers on the BSE.

Copper, the ubiquitous reddish metal is all important. Being omnipresent all around us, this metal is stated to be the indicator of the true economic state. When the economy is booming, copper prices zoom and demand is high and vice versa when it is in recession.  The red metal goes under the moniker of “Dr Copper” given its ability as an economic forecaster and its price movements show shifts in the world economy.

Right from the cable which carries your electricity to the car which runs on the road, your laptops and PCs and mobile phones, construction and realty, all have copper. And given its wide usage unlike any other metal, it is thus considered to be the harbinger of economic sways. China consumes almost 40-50% of the global copper output and when imports to China spikes up, everyone assume that the best times have begun.

Thus every time there is talk of an economic recovery, eyes shift to copper – has the demand for the metal gone up to indicate this economic recovery?  So when the World Bank released its doom and gloom kind of report today, predicting that the world economy will expand 3% in 2015, down from a projection of 3.4% in June, naturally copper sank further.  The World Bank report went on to say that there is risk of the Eurozone sliding into permanent stagnation without support from the European Central Bank (ECB) and warned about the risk of the world economy depending too much on the “single engine” of USA to support recovery.

Then again the question – can price of copper alone be an indicator of the economy? Eyebrows had shot up in May’14 when China's copper imports had surged 65% (YoY). Did that mean that recovery in a huge way was underway in the second largest economy of the world? Not really. This surge in May was China taking advantage of the low prices and stocking up on the metal for future use. This surge in imports which ideally should have heralded economic recovery was a misnomer in May. In fact ANZ Research put out a report stating that out of the 1.6 million metric tons of copper imported into China in Jan-May period, around 5,00,000 tons was in the warehouse.

Thanks to this, there are many who today feel that copper or for that matter, any commodity as such cannot become the indicator for economic activity. China has been taking advantage of the low price of many commodities and stocking up for later; so how can buying for restocking indicate economic recovery?

Many feel that automobiles demand and supply should be the true and first indicator while some feel that consumption of electricity should be the best indicator. But then again, in a country like India where there are power outages of over 6-8 hours every day, would that then be a true indicator? Or in a country like China where data is so sketchy and questionable, power consumption does not seem to be the right indicator. And if we go by automobiles then right now we are surely on the path to recovery.

Can oil be a better indicator than copper? Not at all! There are too many speculative forces at work in oil. Any regional tension causes a spike up in oil prices and the ongoing plunge was never expected. Thus it is not essentially the best indicator of a recovery.  Yet, it would be too naïve to assume that only copper indicates a recovery. It is collectively all – electricity, automobile, money supply, oil and gold which give us a picture of the things to come. Copper alone was good enough as an indicator when 90% trading was physical and 10% was speculative. Today, this ratio has also undergone a change. More importantly, there are many cheaper substitutes for copper - aluminum and other alloys, optical fiber and wireless, and as this percentage goes up, copper might not rule the roost.

Yes, there is definitely a correlation between copper and economy but it alone is no longer the true barometer. But if we use that as an indicator for now, the news is not all that great.