‘DR. COPPER’ SINKS TO EIGHT-MONTH LOW
Copper goes by the nickname “Dr. Copper” because history shows the red metal is a leading indicator of the global economy’s health.
Unfortunately, it hasn’t been telling us anything good lately.
The red metal has recently been in a swan dive, dropping close to 10% since mid-February and falling steeply in the past couple of trading days.
The key futures contract on Monday briefly sunk below US$3 a pound, its lowest level in eight months.
As is usual with commodities, China appears to be the culprit. Investors were spooked by recent Chinese trade data that showed a stunning 18.1% year-over-year drop in exports in February. That left a trade deficit of US$23-billion.
“It was a big number that probably surprised people,” said Kerry Smith, an analyst at Haywood Securities.
There was already a lot of concern in the market about the Chinese economy, particularly after its first-ever corporate bond default last week.
But copper, much like China, has shown remarkable resilience in recent years.
Copper since 2010 has periodically dipped below the US$3 level, but has rapidly bounced back every time.
The metal seemed to be finding a comfort zone around US$3.20 or US$3.30 a pound before the recent drop, and that is where many commodity strategists think it belongs.
However, the current decline has reminded investors that there is an awful lot of available copper in the market.
A surplus is expected in the copper market this year, with some estimates pegging it at 400,000 tonnes or more. And the supply keeps rising.
Mine production rose 6.7% last year, according to Thomson Reuters GFMS, and is expected to climb another 5.8% this year to 18.7 million tonnes.
The increase is a result of the billions of dollars of investments that mining companies committed to years ago, when base metal prices were running much higher than they are today.
It is far too late to reverse that spending.
“There was a lot of overinvestment in the mining sector,” said Aaron Fennell, commodity futures specialist at ScotiaMcLeod.
On the other hand, many early stage projects will probably be halted if current prices persist for an extended period. GFMS said last month that delays to greenfield projects are “almost inevitable” based on its supply projections.
Mr. Fennell suspects the recent drop in copper is not entirely due to supply and demand. When a commodity moves as abruptly as copper did over the past couple of trading days, he said it probably means a big player or two just needed to get out of the market. “You just have to trust economics will come back into play to push the market back to where it was prior to this situation,” he said.
As a result, investors and economists will be watching Dr. Copper carefully over the next few weeks.
If it quickly rebounds yet again, the most recent drop will be forgotten in days. But a prolonged slump could set off fresh economic warning signals.