Copper Price and Economy

Figure 9: Copper price and world trade
Source: CPB, Thomson Reuters Datastream
Figure 10: Relation copper price and fundamentals
Source: ABN AMRO Group Economics
Figure 11: Real copper price and LME stocks
Source: Thomson Reuter Datastream, ABN AMRO
is more often positive than negative (see figure 6 and the annex),
meaning that when the dollar weakens, demand for copper will
increase (and hence the copper price will rise). This is also evident
from the regression analysis on the basis of the dollar index (i.e. the
dollar’s weighted value against a basket of major currencies). At 0.75,
the dollar index has a strong negative correlation with the copper price.
The copper price and global economic activity
Developments in the world economy have a strong correlation with
movements in the copper price. Trends in Chinese GDP growth (and,
to a lesser extent, US and EU GDP growth) and world trade play a
major role. The correlation with China is the key factor in this context.
China accounts for the largest share by far of global copper
consumption (around 46%), and also has a large share in the total
production of pure copper (around 34%). Given these figures, it is
hardly surprising that economic developments in China are very closely
tied to the copper price. The EU accounts for some 18% of global
copper consumption, and the US for around 8%. Consequently, the
correlation with EU and US GDP growth is slightly lower.
The link between world trade and copper price movements is also
strong. Given that production and consumption of metals generally take
place in different parts of the world, global trade in ores and refined
metals (by land or sea) is unavoidable. When the copper price falls, this
may point to a fall in demand, and consequently a decline in global
trade in dry bulk goods (iron ore, copper, aluminium, etc.). In this
sense, the copper price can serve as an indicator for world trade
volumes. However, spikes in the copper price (as happened in mid-
2006) may disrupt the patterns and make it more difficult to assess
world trade volumes.
Uncertainties about national economic policies have a limited long-term
correlation with the copper price. Even so, economic policies may
affect copper price movements over time. Growing economic policy
uncertainties tend to depress investments in fixed assets. This will
reduce demand for copper, which will cause its price to fall. However, if
the uncertainties are alleviated, and hence risks are reduced, the
copper price should receive an impulse.
The copper price and fundamental factors
The manufacturing industry is an early-cyclical sector and has a strong
correlation with overall economic activity. Changes in different industrial
indicators (such as the purchasing managers index and industrial
output) can be used to identify or interpret implications for economic
growth at an early stage. When global industrial activity increases and
order books are filling, demand for base metals (including copper) will
pick up. This will push the copper price upwards. Conversely, when
global industrial demand falls (to a relatively lower growth rate or even
to contraction), and economic activity consequently declines, then
demand for copper (and hence the copper price) will also fall.
The steel industry supplies to end-user sectors that are also heavy
users of copper (such as construction and automobile production),
which explains the very strong correlation. However, because of the
overcapacity in the steel industry, the current output level bears no
relation to the demand for steel and this is having a disruptive effect.
The supply of copper ores, the quality of the ores and the costs of
extracting them also have an impact on the copper price. Chile is the
Noot: bollen in rood = negatieve correlatie; bollen in groen = positieve correlatie
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