What if anything does the recent softness in copper prices reflect about global economic activity?
The stronger U.S. dollar exacerbates the softness in copper in addition to weak economic activity. Copper prices may reflect more weakness in the housing and construction industries and to a lesser degree the automobile sector, but it may not reflect as much about other areas of the economy. Also, the fall in oil prices in the past year has cut GDP growth for many of the oil producing countries that may slow the demand for copper as emerging countries take longer to develop. Finally, the supply side matters as adjustments may be made according to inventories and demand.
How important is Chinese economic growth to the copper market?
Considering China is the biggest copper consumer, Chinese economic growth is important to copper. However, on a per capita basis, Chinese consumption of copper is still only about half of North American consumption. This makes copper particularly likely to increase with increases in Chinese demand. Other factors on the supply side that may be seasonal, regulatory, or financial also influence the copper market.
What is the current supply/demand balance for the copper market? Is it a market out of balance?
Copper inventories been building, reaching short term highs. However, over the longer term, the 5-year LME Copper Stocks are still relatively low. The roll yield turned negative just this month indicating excess inventories; though on average for the year the roll yield is positive that measures shortages.
In Q1 2015, ICSG (International Copper Study Group) reported usage declining around 3% with a 4% drop coming from China. World mine production increased around 1.5%. In total, the world refined copper balance in Q1 adjusted for the change in Chinese bonded stocks indicates a production surplus of around 182,000 mt, compared with a deficit of around 70,000 mt in the same period of 2014, the ICSG said.
Does copper have a strong correlation to global GDP? Or does it have a strong correlation to any other economic trend or market?
S&P DJI research finds that Dr. Copper is not so smart. The supply side of copper is extremely important in its price formation so we find the historical correlation of copper to world GDP growth of only about 0.4. Further, it seems copper holds up well during weak recessions, up about 7% on average in weak recessionary years, but it only falls dramatically, about 30% on average in periods of strong recessions.
Copper returns are positively correlated to both expected and unexpected inflation, though the correlation to unexpected inflation is more significant. The sensitivity of copper to expected and unexpected inflation is relatively high with betas (or slopes of the regression) of 24.5 for expected inflation and 38.6 for unexpected inflation.
This article was written by Jodie Gunzberg, Global Head of Commodities at S&P Dow Jones Indices.
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