Investment Matters

Dr Copper's advice?

The expression "Dr Copper" refers to using the copper price as an indicator of the world’s economic health.

The concept of Dr Copper

Copper is used in a lot of things – from making cars, electricity generation and distribution, household items and industrial manufacturing.  Thus, it acts as a good indicator of future economic demand and health.

Generally increasing copper prices indicate a growing global economy.  Whereas, declining prices can indicate declining demand and a coming economic slowdown.

Copper price recently

The copper price had a recent peak at US$7,330.50 on 7-Jun-18, before falling 17.6% to mid-Jul.  In the last 2 weeks it has had a slight recovery.

IM graph

Source: IRESS, First Samuel

The recent price fall is not indicating anything like a GFC.  But it is a contradictory indicator to the general positive sentiment about economic growth.  And we believe it is worth taking note of.

Not a perfect indicator

But the use of the copper price as an indicator is not perfect. For example:

1/ Short-term volatility

In recent weeks the Chinese government has enacted stimulus.  It is understood that this has been in response to the US tariffs, their share market rout, and to prop up waning economic growth.  Not without coincident, the copper price has stabilised.

Over the coming weeks and months, we expect it will become clearer whether the copper price is indicating a peak in the economic cycle (i.e. the price resumes its decline after a temporary Chinese stimulus induced bump), or a more positive outlook for the world’s economy (i.e. the price stabilises / rises).

The last month or so is, however, an example of how short-term actions and / or sentiment can influence copper’s price.  Therefore using it as an indicator for a short period of time can be flawed.

2/ Longer term trend

Mining copper is getting harder.  Grades (percentage of Cu in the ore) are getting lower, reserves reducing, and new finds are generally deeper and harder to extract.  Thus, we believe there will be an underlying upwards trend in the copper price, even if demand for the metal were to remain flat.  It is hard to predict what specific price growth this will represent, as it is dependent on many unknown factors (e.g. finding another Escondida would change the game!).

Conclusion

Recent falls in the copper price (despite a slight recovery in the last two weeks) might indicate a upcoming economic slowdown.  However we are mindful that this is in contradiction to other economic data regarding the health of the world’s economy.