I recently spoke to my friend Chester Ntonifor who is a commodity analyst about the economy. Given the volatility of markets and fears of a double dip recession, I asked him where we could look in the commodity market to gauge the probability of that type of outcome.
Here was his interesting response related to copper prices,
“It is no surprise that the trend copper prices have been an excellent barometer for where the global economy is headed. The red metal is used in everything from houses, cars, air conditioners to IPADs making it very sensitive to the pulse of consumers. The average American still consumes 15lbs of copper every year, even though the U.S. is well past its industrialization phase. Meanwhile, the average Chinese consumer is already close to U.S. levels at 12lbs per year, but has been doubling this figure every 5 years.
Justifiably, copper prices are down 10% from their February peak in response to ongoing fears of a renewed recession. However, this decline is not yet cause for alarm. Historically, copper prices have done an excellent job signaling when an economic slowdown is about to become more protracted. This is usually associated with a 20-30% peak-trough drop in the price of the metal. This occurs well ahead of official GDP declines that trigger economists worldwide to declare we are in a recession. Businesses are typically forward looking, and will cut copper inventories, halt copper ore imports and reduce final production long before their sales numbers sustainably decline. Given copper’s ubiquitous use in everyday applications, this gives it some economic diagnostic ability.
Of course, an external shock such as a freeze up in European credit markets will hit both businesses and consumers simultaneously, leading to a synchronized decline in both demand and prices. But so far, demand for copper intensive products is holding up. For example, orders for new aircrafts are edging higher in the U.S. Meanwhile, just last month, China manufactured 28% more air conditioners than it did in July last year. My sense is that the recent blip in copper prices is more a reflection of a mid-cycle slowdown, than a prelude to a fall-off in demand. But things could well change very quickly.”