• Copper price has fallen rapidly since March 2022
• Cheaper “Dr. Copper” indicates a slowdown in the global economy
• Main sufferers: States with high copper exports and copper-mining companies
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Economists have been paying special attention to the copper price for decades. Even more than other metals such as silver, iron ore or aluminum, copper is considered an important economic indicator. If “Dr. Copper” is expensive, a strong economic development can be assumed. On the other hand, if the reddish industrial metal weakens, the opposite is the case.
Rapid downward movement in the copper price
Few market observers will like the fact that copper has lost value rapidly in recent months. While the metal marked a record high of around US$10,700 per ton on March 7, the price is now only US$7,765.60 (price on July 28, 2022). Copper was last quoted below USD 8,000 per ton in December 2020. Such a decline of more than 30 percent within about four months is exceptional from a historical perspective and is likely to indicate a particularly rapid deterioration in the economic situation. All the same, the downward momentum in July was significantly weaker than in June, which suggests that the lower demand could now be partially priced into the price of the shiny red industrial metal.
Which is signaled by a flagging “Dr. Copper”.
Copper is used in numerous sectors such as the electrical industry, mechanical engineering, the construction industry and vehicle construction. A fall in the price of the industrial metal thus indicates lower demand from companies, which in turn react to an expected fall in demand from customers. For this reason, copper is considered a particularly early indicator of changes within the economic cycle, which are only reflected in the official economic data with a delay. “Copper is a pioneer, a leading indicator,” explained market expert Robert Rethfeld from Wellenreiter-Invest in an interview with “tagesschau.de”. In this respect, the copper price is comparable to the yield curve for bonds: If this is inverted, as it is currently (i.e. bonds for 2-year US Treasury bonds bring a higher yield than 10-year ones), this also points to an economic slowdown, according to Rethfeld . Thus, the fall in copper prices together with the inverted yield curve could be interpreted as a harbinger of a global recession.
“The price of copper signals that inflation may have peaked,” Rethfeld explained. “If copper continues to fall, momentum towards recession will increase.” Other commodity prices, such as the price of oil or aluminum, have also shown a weaker trend in recent weeks. On the one hand, this could reduce inflation somewhat, on the other hand, the lower demand for resources indicates a weaker situation for companies and therefore points to the risk of a recession.
Analysts reduce copper price expectations
The analysts are also reacting to the changed situation on the copper market. While Goldman Sachs previously expected the price of copper to rise in view of sustained demand and further supply bottlenecks, the US investment bank now expects demand to fall. The bank downgraded the expected price level of copper in three months from USD 8,650 to just USD 6,700. The team around analyst Nicholas Snowdon justified the changed expectations with the expected European energy bottlenecks in winter, which are likely to affect consumer demand as well as industrial activities. Should the feared gas emergency actually occur, the copper price could even fall to 4,000 US dollars, the Bank of America predicted.
Who is suffering the most from the “Dr. Copper” crisis
The main victims of the fall in copper prices are the largest copper exporting countries, Chile, Peru, China and Congo. Especially the economy of Chile, which according to data from “23degrees.io.” 5.6 percent of the global copper supply shows a high correlation to the price of the reddish heavy metal: if this is high, the Chilean economy is usually flourishing – and vice versa. In addition, the copper mining and processing companies groan under the price slump. The share of the largest German copper processor, the MDAX company Aurubis, lost enormously in value in the course of the copper price drop. While the price for a security of the Hamburg company was at times EUR 115 during the copper price high in March, now only EUR 70.2 has to be paid for a share certificate (as of the closing price on July 29, 2022). The international copper giants such as Glencore, Rio Tinto and Freeport-McMoRan have also fallen significantly short of their highs for the year.
What a copper low could mean for the stock markets
On the other hand, a copper low could also bring positive things: In economic history, such a low was usually synonymous with the lowest point in stock prices. With a final copper low, “we would also see an end to the bear market in equities,” emphasized market expert Rethfeld. He added a reference to the financial crisis: At that time, the copper price had already reached its low in December 2008, the stock markets followed three months later in March 2009. This time, too, a completed bottoming out of the copper price could signal a sustained stock market recovery.
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