In my last blog entry on October 7th, I argued that that the bull phase in copper is far from over. The most recent drop in the price of copper is suggesting softness in demand but this could only be a temporary phenomenon. Apart from a keen interest in copper’s own investment prospects, market watchers also look at copper for guidance on the direction of the economy.
As I mentioned in my previous article, since copper is used in all sorts of things it is considered a barometer of economic health and is revered for its forecasting guidance. So the theory goes that the demand for copper is a great harbinger of the overall economic growth. Furthermore, the demand trends provide an early indication of how manufacturing and construction are trending. So, when the demand for copper sags, it indicates that general economic slowdown and even recession is down the corner- hence the moniker "Dr. Copper".
For people with a strong memory, it should be easy to recall that after being beaten down in the early stages of the financial crisis during 2008, copper started to pick up at the end of 2008, a considerable time before the stock markets started to show signs of life and before the global economy turned corner.
The recent plunge in copper prices have prompted many experts to argue that the global economic growth is about to experience a severe slow down and a double dip recession. The main argument in favour of such predicament is the concern regarding China’s economic growth and for good reason. China does consume over 40% of world’s copper output currently and any slowdown there will bode ill for both copper and the global economy.
During the last downturn it was emerging economies, especially China, which held up well and pulled the globe out of its economic funk. It is also true that the copper price is also merely following a slowdown in the overall global manufacturing activities, which are trending down as indicated by the global manufacturing index during the recent months.
I would argue that the truth is probably more complicated. As a start, despite the recent plunge, copper prices bounced strongly from its low levels and are still at fairly decent level. In fact China has been destocking its copper stock as the price of copper went through the roof lately. Some experts are speculating that China will start to replenish its copper pile, which seems to be happening already, hardly a sign of an imminent collapse in the world’s 2nd largest economy. Other fast growing emerging countries such as India and Brazil are also not showing any sign of hard landing.
As a block, emerging countries already account for over 40% of the world’s GDP measured in purchasing power parity (PPP) terms and will increase their share to over 50% by 2013. No one is suggesting that this block is slipping into recession anytime soon. Even the once mighty but recently struggling US economy is not expected to slip into a technical recession based on the most recent data from manufacturing, retail and services.
The rich world is still facing a unique set of problems as financial de-leveraging continues in the US and the crippling debt in countries like Greece and Portugal put the whole financial system at risk. However the world is facing this slowdown in a much better shape than it had during the crisis of 2008. Even in the rich world, banks are better capitalized and corporations are flush with funds. The emerging countries are slowing down a little but there is no indication they are going to experience a hard landing and crash. Add to this a very accommodative monetary policy adopted by most central banks around the globe, which should be conducive to the economic health.
So it does seem that copper is predicting a severe global economic slowdown, but I believe that an outright recession is not the likely fate for the global economy. Dr. Copper still does a fairly good job of being the economic bellwether, but its accuracy in predicting the true state of the global economy may just be little dented in this fast changing environment.
Vikas Ranjan is a Director of Ubika Research, a specialized research and analytics company with a wide range of small cap clients and operations in Toronto and Vancouver. He holds a BA in Economics (Hons.), Masters in Management Studies from University of Mumbai, India and MBA in Finance from McGill University. Prior to co-founding Ubika, Vikas co-founded P2P Systems Inc. a company acquired by Toronto based technology company, Microforum Inc.
Disclaimer: Except for the historical information presented herein, matters discussed in this document contain forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from any future results, performance or achievements expressed or implied by such statements.
Ubika Research and www.smallcappower.com (are both divisions of Ubika Corporation), and are not registered with any financial or securities regulatory authority, and does not provide nor claims to provide investment advice or recommendations to readers of this report. For making specific investment decisions, readers should seek their own advice.
For full disclosure please visit: http://smallcappower.com/disclosure.aspx