The copper market crashed overnight to its lowest level since the middle of the financial crisis in 2008, fueling fears that the global economy is slowing more sharply than many experts had anticipated.
Wednesday’s drop is the sixth consecutive decline in copper prices. Currently trading at around $5,560 a ton, the prices are causing significant pain to mining companies like Glencore, whose stock responded to the copper crash by hitting a record low.
Like oil, copper has a deep effect on the world economy because it is key for phone lines, cables and other infrastructure. It is also important to several world economies; the world’s largest copper producers, in order, are Chile, China, Peru, the US and Australia.
The copper market is just the latest commodities market to suffer from a kind of panic, as oil prices have halved in just a few months.
Copper is also at the center of a black market trade that has been shrinking from a level of $1bn just two years ago, as an epidemic of copper thefts swept the country with thieves robbing warehouses and stripping telephone wires to resell the metal for a profit. The National Insurance Crime Bureau, which tracks metal theft, called the crime wave a threat to US infrastructure. Claims for metal theft have since declined, the NICB said.
The worry about the fall in copper is that the rout in crude-oil prices could be spreading to other commodities, sparking concerns that the slowdown in the global economy might be much deeper than thought and not limited to the energy market.
China, with an economy that has grown relentlessly in recent years, is the world’s largest user of copper, eating up 40% of supply. China’s imports of copper hit an all-time high in December.
But China is slowing. Just Tuesday, the World Bank suggested that a “disorderly slowdown” in China would force it to reduce its forecast for global growth outside the US. It said the slowdown in Chinese property and land sales will prevent the national and local governments from boosting growth by investing in infrastructure. The World Bank said the world economy would grow by only 3% for 2015, down from an earlier estimate of 3.4%.
“I’m getting worried that this [drop in copper prices] is telling us not all is right with the global economy and that it is slowing faster than anticipated,” said Robin Bhar, head of metals research at Societe Generale.
“If you asked me three to six months ago, I would have been less worried; I would have said it’s oversupply of oil, iron ore, coal. But the combination of greater supply with weaker demand is suggesting it’s indicative that the global slowdown is taking place.”
Why does copper matter? Because it’s used in all sorts of building materials and historically its price movements were tracked for insights into the robustness of industrial activity. “Copper is a good barometer of economic health and always has been,” Bhar said.
While there are concerns about the slowing global economy and whether the strength of the US economy can withstand sluggishness elsewhere, Bart Melek, head of commodity strategy, rates and foreign exchange research at TD Securities, said the copper market itself has had its own problems for a while now.
Chiefly, its problem is overproduction. Copper mining supplies are growing at a faster pace than demand, and have been since 2013, Melek said.
Melek said copper demand from China, the world’s No 1 user of the red-colored metal, is still expected to grow by 4% to 4.5%, but the issue is that previous expectations were for greater growth.
“I think there is certainly concern on the part of Chinese traders,” he said, noting most of Wednesday’s price break occurred during Asian trading hours. During the US trading day, prices started to rise off those lows.
Bhar said what may have triggered Wednesday’s plunge is that in the past few days there were fewer purchases by metal buyers, sending signals that perhaps copper users wouldn’t need as much supply as originally thought.
Combine that with the weakness in oil, a trend of weakening copper prices anyway (prices fell for much of 2014) and general malaise about the global economy and there were reasons to sell, he said.
And of course, trimming copper production in the face of lower values isn’t as easy as pressing the “off” button for miners. It takes a long time to stop and restart production.
Finally, Melek said, a lot of investors who buy commodities do so via indexes which hold baskets of several commodities. Many of these indexes are dominated by energy, and their big losses from 2014 have persisted into 2015.
Investors could be shedding these holdings, leading to losses across commodities, including copper.
“With oil acting in a bad, bad way, investors who own these indexes are dumping everything. They’re throwing copper away with their broad commodity [investments],” he said.
This article was written by Debbie Carlson, for theguardian.com on Wednesday 14th January 2015 18.02 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010