A Decade In Commodities: In Base Metals, Dr. Copper Becomes Dr. Who?
Investing.com | Dec 26, 2019 04:39
For this almost-finished decade, every sector in commodities has a different story to tell. In base metals, it’s about copper: the metal that’s supposed to tell us everything we need to know about the economy just through its price. Its diagnostic ways are so fabled that it's even sometimes called Dr. Copper .
Get The App
Get The App
Yet, there’s nothing about the economy that copper prices have gotten right this decade. In fact, the disconnect between the red metal and the economy has been so great over the past ten years that to the uninitiated, the mere utterance of Dr. Copper might elicit the response: “Dr. Who?”
Get The App
Get The App
A look at the world economy and copper prices will tell why.
Get The App
Notwithstanding the 2008-2009 financial crisis, world gross domestic product still grew by a compounded 29% in the previous decade, or at an average clip of 2.9% per annum, World Bank data shows. Quite phenomenal for a period that contained the greatest recession in history.
Get The App
Copper prices, in comparison, started January 2000 at 86 cents a lb on the New York Mercantile Exchange’s COMEX division and finished December 2009 at $3.33. That’s a whopping 287% growth. Clearly, copper in this era wasn’t just reflecting the economy — it was front-running it.
Get The App
Get The App
Get The App
But over the next ten years, the story unraveled.
Get The App
Get The App
While world GDP growth was almost exactly the same this decade as the last — expanding a compounded 30%, or an average of 3% per annum, between 2010 and this year — copper took a different path.
Get The App
COMEX prices of the red metal went from their January 2010 start of $3.33 a lb to their current standing of $2.83. That’s a 15% drop instead.
Get The App
In a span of just two decades, copper as the world’s leading industrial metal, had gone from hero to zero. Why the total collapse in correlation?
Get The App
One reason: the latter half of this decade has been filled with fears of a global economic slowdown — which although they haven’t panned out, have put a cap on copper prices. The Trump administration’s trade war with China, for instance, has been one of the biggest antidotes to higher copper prices.
Get The App
Financial Times columnist John Dizard said in an October post that copper “tried, feebly, to get out of its sickbed at the end of the summer, only to fall back again after the middle of September.” Using three-month London Metal Exchange prices, a more globally-referenced benchmark for copper, Dizard noted that the market could barely keep above $5,600 a tonne in early October.
Get The App
Get The App
The $5,600 level covers the cash operating costs for existing mines, but was nowhere near enough to draw investment to new mines, said Dizard, adding that this was “assuming someone has found the stuff, measured the deposit, laid out transportation and water supplies, and arranged all the permits.”
h2 New Mining Interest Almost Dried Up /h2Jeffrey Christian, a renowned consultant in the global metals industry, points to another problem. “No one wants mining, but they want the product,” says Christian, who speaks from 33 years of experience in running the New York-based metals statistical and advisory service CPM Group.
Get The App
He adds:
Get The App
“We are working on three continents with governments and industry associations to see what can be done about [the lack of new mine investment]. Now institutional and retail investors are simply not investing in junior mining companies, because they have lost money at it for so long.”
Get The App
A mining “fix” will require higher copper prices, say other analysts, who point to the army of workers needed to excavate mines, pour (low-carbon) cement, build roads and railways, construct beneficiation plants and refineries, and monitor waste disposal.
Get The App
Get The App
One of those analysts, Paul Gait at Bernstein in London estimates that copper needs to be priced at $8,800/tonne, or 40% above current levels, to provide that fix.
Get The App
Get The App
Other industrial metals analysts at Goldman Sachs, Morgan Stanley, Bank of America, Citigroup and Jefferies think copper and the economy will sync again in the decade beginning 2020, because low inventories, supply constraints and better demand will boost prices.
Get The App
Get The App
“Copper is our most bullish view,” for 2020, Goldman’s metals analysts said, citing China’s property market boom, government infrastructure stimulus and grid investments.
Get The App
Get The App
Jefferies, another U.S. investment bank, is just as optimistic about the red metal’s chances in the coming year. Current supplies of copper won’t meet “even a modest cyclical recovery in demand” in 2020, Jefferies analyst Christopher LaFemina was quoted saying by Bloomberg.
Get The App
Get The App
We’ll have to see if these views pan out, and whether Dr. Copper will go back to foretelling the economy.
Get The App
Get The App
Get The App
For now, 2019’s biggest base metals is nickel — whose prices are up 34%, boosted by ramped-up demand for electric vehicle batteries and an Indonesian ban on nickel ore exports.
Get The App
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.