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COVID-19: Why ‘Dr Copper’ offers an encouraging prognosis for world economy

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If you are looking for a barometers of global growth and where the world economy is going next, the price of copper is not a bad place to start.

The red metal is nicknamed “Dr Copper” in commodity markets because it is a good gauge of economic activity, thanks to its numerous and ubiquitous applications, whether that is in industries such as car-making, electrical goods or in the building trade.

And the good news is that the doctor is currently diagnosing strong growth for the world economy.

South America is the largest producer of copper
Image:
South America is the largest producer of copper

The London Metal Exchange price of copper for delivery three months from now hit $8,028 a tonne on Friday, its highest level since February 2013, while the price as traded on the Shanghai Futures Exchange earlier hit a nine-year high of $9,0995 a tonne.

It caps a stellar performance during which the price of copper has risen in each of the last seven weeks. The rally also represents a significant turnaround in sentiment following a collapse in the price when, earlier this year, investors were in the depths of despair over COVID-19.

Even as far back as early February, when most investors thought coronavirus was merely a Chinese problem, the price fell to as low as $5,600 a tonne. That, in itself, was hardly surprising.

More than half of the world’s supply of copper is bought annually by China and so, even if the virus been contained to that country, the price would have fallen.

As the pandemic spread to Europe, in March, the price of copper sank below $5,000 a tonne for the first time in four years.

Copper was not alone in that: the price of nickel, a key element in stainless steel production, also crashed, as did the price of other commodities, notably crude oil.

Oil prices have mirrored copper in recovering over the past few months
Image:
Oil prices have mirrored copper in recovering over the past few months

From the beginning of the year, copper fell by 22%, taking it as low as $4,774 a tonne at one point in March.

Then, as it emerged that China had quickly contained the virus, optimism began to grow that the global economy could quickly bounce back.

By early June, the price had rallied to $5,800 a tonne. The speed of the recovery led some analysts to wonder whether the metal had lost its ability to accurately predict where the global economy was heading since most of the rally at that time was apparently driven by drawdowns in copper stocks from warehouses and concerns that miners in Chile and Peru, the world’s biggest two copper producers, could be afflicted by the virus.

The $7,000 a tonne level was breached on 21 October and then, from there, the next stop was the $8,000 level broken today.

The big question is whether copper still has its doctorate and whether it is accurately predicting where global growth is heading.

Plenty of market participants believe the recent rally has been driven by little more than speculation. They note that most recent buying has not come from industrial buyers in China who, normally, would be a key source of demand.

John Meyer, head of research at commodities specialist SP Angel, points out that there is a lot of exuberance in financial markets generally following the roll-out of vaccines around the world and a definitive result in the US elections.

He told clients that there were also specific factors influencing the price of copper in particular, not least a shortage of containers, which he believes has the potential to disrupt metal supplies into China.

He said: “Many copper and other high-value mineral producers use containers to transport product into China where stock levels are relatively low, due to new stimulus demand.

“Sometimes they use dedicated containers, but often these containers are en-route back to China, having dropped other goods off in the West.

“Disruption by EU customs officials ahead of Brexit, alongside record container shipments into the US west coast, is not helping the situation.

“Few miners or traders will want to risk transporting copper cathode in a less secure form due to its value.

“[So] the disruptive impact of a multitude of delayed shipments may be to raise prices further from here.”

Other factors driving the price of copper include the weakness in the US dollar which, earlier this week, fell to its lowest level in two-and-a-half years against both the pound and the euro.

As copper is priced in dollars, any fall in the US dollar automatically makes the commodity cheaper to those buying in other currencies.

Supplies in warehouses are also low following a big pick-up in the autumn in industrial and investment projects in China that sucked in more copper. That showed up with figures earlier this week which revealed that Chinese factory output grew at its fastest pace last month since March 2018. China is reckoned to have imported more copper during the first 11 months of this year, despite the pandemic, than in the whole of 2019.

Mr Meyer said that, as miners scramble to make up the shortfall with extra production, that would play into the hands of mine workers.

He added: “Mine workers in Chile seem to have cottoned on to the incoming supply deficit, and are demanding higher levels of compensation which has led to strikes at various operations.”

In the short term, analysts expect the price to carry on rising. The influential commodities research team at investment banking giant Goldman Sachs predicted earlier this month that, during the next year, the price could reach $9,500 a tonne due to supply shortages and a rebound in demand.

Longer term, there are big unknowns. One is the extent to which electrical vehicles will take off in Europe and the US.

Electric cars
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Electric cars are heavy users of copper

An electric car uses about three times as much copper as a traditional petrol or diesel engine. Higher take-up of electric vehicles would also, in turn, will spur demand in industrialised nations for copper in cabling up and operating charging points. More copper will also be needed as economies across the world transition to renewable energy sources – both in construction of these new generating sources and also wiring them up to power grids and transmission networks.

Meanwhile, as miners scramble to meet demand, there are also supply constraints – not least the fact that there have been few new discoveries of copper deposits in recent years.

So the price of copper is being driven by a number of factors both on the demand and the supply sides.

But, for those hoping for strong global growth in 2021, it is an encouraging sign.

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