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Copper - A worrying outlook for the Global Economy?

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JoeIG

Recent global sell-offs and the ongoing US-China trade war have caused copper prices to decline to their weakest levels since July 2017. The price of the metal currently sits at around $6300 a tonne after recovering from its slump below $6000 in August this year. The relationship between prices of base metals and future growth has proved to be evident in the past, so much so that this specific commodity is often referred to as ‘Dr Copper’.

Copper is prominently used across electrical applications, communications equipment, construction, transportation, and industrial machinery. Its wide use means that shifts in the demand and supply of the metal across industries has served as a key economic barometer and as such, a weak price over the past few months is discerning for the outlook of global economic health.

Emerging economies dominate the world’s largest copper producers, therefore any key events affecting EM countries are likely to influence copper prices. Another factor is the dollar. The Turkish Lira and emerging markets sell-off in August propelled the USD to 12-month highs, making the commodity more expensive for consumers outside of the US.

Additionally, Trump’s tariff impositions on Chinese imports has fuelled risk aversion across the stock market. Commodities in particular have taken a hit as traders and speculators grow increasingly concerned about the global economic impact of the deepening trade war. China is still heavily reliant on its manufacturing and industrial sector for the country’s growth and consumes around 40% of the world’s copper, therefore the ongoing rhetoric is the extent of how the trade dispute will impact real copper demand in China.

Despite all this, a supply squeeze resulting from falling inventories may keep copper on track for gains in the long-term. Announcements of new projects and mining operations from global corporations such as BHP Billiton and Glencore in the near future are likely to have an effect on both copper prices and company share prices.

Going forward, rising copper prices could indicate gradual positive sentiment returning to the stock market after significant declines and volatility in the US market over the past few days panicked investors. Indices such as the CSI 300, DJI, S&P 500 and the ASX 200 could experience noteworthy movements on the back of copper prices. Any economic data releases suggesting a slowing Chinese economy may indicate a falling global demand for copper. Conversely, a fatiguing US-China trade war could lead to an improvement in concerns for the global economy and in turn see a rallying of copper levels.

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