Some investors view copper prices as a leading indicator of the global economy. If you are one of them, you have reason to be concerned.
What’s going on: On Thursday, copper prices fell to a 16-month low as traders unloaded the commodity. They’ve decreased by more than 11% in two weeks. “Copper prices are just starting to account for the fact that global growth is slowing,” said Daniel Ghali, director of the commodity strategy at TD Securities.
The metal is found in a variety of building elements, including electrical cables and water pipes. As a result, it’s frequently used as a proxy for economic activity, as demand tends to rise as the economy expands and falls when it contracts. Because of its supposed ability to predict the future, traders lovingly refer to it as “Dr. Copper.”
After Russia invaded Ukraine earlier this year, the price of copper and other important metals skyrocketed. (readers may recall that the London Metal Exchange momentarily halted nickel trade in March due to the chaos.)
According to S&P Global, Russia accounts for 4% of global copper output and nearly 7% of global nickel output. Traders were concerned that supply would run out just as the economic recovery from the pandemic began, so they began hoarding aggressively.
Prices are now moving in the opposite direction as recession worries take root.
“Once that stockpiling impulse ended, then global commodity demand started to reconnect with global growth,” Ghali explained.
The first glance at a carefully monitored economic barometer for June confirmed that economic activity is slowing as rising food and fuel prices pinch.
According to the S&P Global Purchasing Managers’ Index, which was released on Thursday, private sector output in the United States slowed “sharply” this month.
“Having enjoyed a mini-boom from consumers returning after the relaxation of pandemic restrictions, many services firms are now seeing households increasingly struggle with the rising cost of living, with producers of non-essential goods seeing a similar drop in orders,” said Chris Williamson, a chief business economist at S&P Global Market Intelligence.
Businesses are also becoming increasingly concerned about the prospects as the Federal Reserve aggressively raises interest rates in an attempt to keep price increases in check.
“Business confidence is now at a level which would typically herald an economic downturn, adding to the risk of recession,” Williamson added.
According to the PMI estimate for the 19 eurozone countries, growth in June fell to a 16-month low.
And China, which has been a critical driver of the global economy, is still dealing with the consequences of Covid lockdowns and a real estate downturn. The country’s economy improved somewhat in May, although retail sales fell for the third month in a row.
What’s next: Growth in China is projected to speed up later this year, and copper and other base metals prices could return at that point, according to Darwei Kung, portfolio manager for commodities at DWS. It’s simply a matter of time before it happens. “They are coming back, it’s just a matter of timing,” Kung explained.
Meanwhile, as economic concern remains, prices may fall more. “Over the medium term, copper prices do have more room to fall, especially as we stare down the barrel of a recession,” Ghali added.