Copper Price and Economy
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Copper price & economy - Copper price as an economic indicator - October
2014
Figure 12: Copper price and strongest relations
Source: ABN AMRO Group Economics
world’s largest producer of copper ore, with a share of around 32% of
the global mine supply. Declining production and other shocks (such as
bad weather or strikes) also have an impact on ore prices and pure
copper prices. However, analysis shows that the long-term correlation
between Chilean copper ore production and the price of pure copper is
less strong. When ores are in short supply, the price will rise, and this
will tend to drive up the production costs of copper and hence the price
for pure copper. But at the same time, the treatment & refining charges
(TC/RCs) will also fall. When the supply of ores declines, the TC/RCs
will also decline, and vice versa. This effect also means that the link
with the market for concentrates is relatively weak.
An analysis of stocks of pure copper in LME warehouses and the
copper price shows that there is no long-term correlation. Even so,
stock levels do have an impact on the copper price over time. When
stocks are low, the price will be relatively high; and when stocks are
high, the price will be relatively low. This correlation was quite strong
up to and including the financial crisis, which broke out when Lehman
Brothers collapsed in 2008. But after 2008, the copper price hit a new
record which was not in keeping with stock volumes at the time. This
illustrated that copper price formation has become more independent
from stock level developments since early 2009.
A striking feature is that in the United States, the long-term correlation
between the copper price and end-user sectors (such as home sales
and automobile production) is limited. But with an 8% share of global
copper consumption, developments in the United States have a smaller
impact than those in the European Union or China.
Is the copper price a leading indicator?
At different points in time and with varying intensities, external factors,
global economic developments and fundamental factors exert an
influence on the copper price. Fundamentals (especially global demand
for copper) continue to play a very important role in copper price
formation. Based on trends in copper demand, conclusions can be
drawn concerning the state of the world economy. After all, lower
demand for copper points to lower industrial activity and hence to
weakening global activity. However, the copper price also responds
strongly to macro-economic figures, which may disrupt the correlation
with fundamental factors and may somewhat affect price volatility. But
this would have more of an impact on short-term trends in the copper
price (which are also partly influenced by investor sentiment and
external factors), whereas the long-term trends are driven more by
fundamentals. Does this make the copper price a leading indicator? In
our view, movements in the copper price can offer valuable insights
into the state of the world economy. In this context, the correlations
with world trade and the Chinese economy are of particular interest.
But we would add a note of caution here, because the relationship
between the copper price and these variables remains somewhat of a
chicken-and-egg situation. In addition, the more intangible factors also
have an impact on the copper price over time, because it is also
affected by investor sentiment and other intangible factors (such as
speculation, the use of copper as collateral, geopolitical issues). These
aspects may well lead to significant fluctuations in the copper price
even though there is no reason for such volatility on fundamental
grounds.
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