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Hammering of copper price a worrying signal for global growth
LONDON, Aug 19, 2018 (BSS/AFP) – The plunge in the price of copper by more
than 20 percent since the beginning of June has worried analysts who see it
as a bad signal for the global economy.
The red metal has acquired the sobriquet Doctor Copper for its ability to
take the temperature of the world economy.
– Why trust Dr Copper? –
Doctor Copper is able to tell when the world economy is going to get sick or
get better because of the ubiquity of copper in the modern world.
It is used in plumbing, heating, electrical and telecommunications wiring.
“Trains, planes and automobiles are full of copper, so too are homes and
appliances,” said Russ Mould, investment director at AJ Bell.
So, it is hard to imagine economic growth without copper, and the market
price of the metal reflects fluctuations in demand.
Economists at the Bank of England who monitor the global growth to set
monetary policy said on their blog that for them it “is crucial to assess
what is happening in the world economy in real time or ‘nowcast’ economic
activity.”
Copper prices provide such a real time signal.
– How good are his diagnoses? –
Last year’s acceleration of global growth surprised the International
Monetary Fund and several central banks.
The Bank of England economists noted that: “Metals prices rose 30 percent
over 2017, reflecting the continued and surprising strength of the global
economy”.
It also works the other way.
“The price of copper fell steeply during the global financial crisis,” said
Andrew Kenningham, Chief Global Economist at Capital Economics.
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“And if it continues for much longer, the latest leg down will begin to look
ominous.”
But copper prices aren’t a foolproof signal as they are also due to supply
factors.
“Copper prices are driven not only by physical demand but also by supply
shocks, speculation and exchange rate movements,” said Kenningham.
As copper is traded in dollars, when the value of the Chinese yuan or other
emerging market currencies fall it becomes more expensive, dampening demand
and pulling the price of the metal lower.
– What is behind current weakness? –
On Wednesday, shares and raw materials prices tumbled as global trade
tensions ratcheted higher and emerging market currencies fell against the
dollar.
Three-month copper futures prices, which were over $7,200 per tonne in
early June, struck a 13-month low of $5,773 per tonne.
“Copper prices have collapsed as concerns over trade tariffs” increased
wrote analysts at ANZ banking group.
Some analysts believe the current lack of appetite for risk assets was
presaged by the drop in copper prices.
“Copper is widely considered to be a bellwether for the global economy and
so a weak price is cause for concern” said Mould at AJ Bell.
BSS/AFP/SR/1720 HRS