Copper as Economy Sage Fails as Growth Defies Price SlumpElizabeth Campbell and Luzi Ann Javier
Copper, dubbed by traders as the metal with the economics Ph.D., may need a new nickname.
While the world economy is forecast to expand by the most in three years, the metal that former Federal Reserve Chairman Alan Greenspan said he once considered a useful indicator is plunging. Prices in New York are off to the worst start to a year since the Comex futures debuted in 1988. In the past 16 quarters, copper moved in the same direction as global gross domestic product just six times. In December, its correlation to the Standard & Poor’s 500 Index was the lowest since 2008.
Found in everything from car wiring to plumbing, the metal’s status as a global bellwether has faded as China came to dominate demand over the past decade, consuming five times as much as No. 2 user the U.S. While the world economy is expanding, deliverable stockpiles of copper tracked by the Shanghai Futures Exchange are up 70 percent since December amid the weakest start for China’s industrial output since 2009.
“The idea that copper is actually a barometer of global economic health is a bit misleading,” said Neil Dutta, the head of U.S. economics at Renaissance Macro Research LLC in New York. “The U.S. recovery in auto and housing isn’t going to be able to offset the weakening demand of copper in China. That speaks more towards a mix of growth, not necessarily the health of the overall economy.”
Copper futures on the Comex are down 14 percent this year. The Standard & Poor’s GSCI Spot Index of 24 raw materials rose 0.8 percent since Dec. 31, while the MSCI All-Country World index of equities fell 1.1 percent. The Bloomberg Dollar Index, a gauge against 10 major trading partners, rose 0.2 percent, and the Bloomberg Treasury Bond Index added 1.4 percent.
Some still see copper as a useful gauge, especially after prices yesterday dropped to $2.877 a pound in New York, the lowest since July 2010.
The metal’s slump is “the foreboding commodity telling you things are not well with the global economy,” said Michael Pento, the president of Pento Portfolio Strategies in Colts Neck, New Jersey. Pento correctly forecast the commodity slump of 2008, when the global recession sent copper down 54 percent.
The world economy will expand 3.7 percent this year, the fastest pace since 2011, the International Monetary Fund in Washington projected on Jan. 21. That’s up from an October forecast of 3.6 percent and 2013 growth of 3 percent. Jobless claims in the U.S., the largest economy, held last week near the lowest level in almost four months, government data showed today. Euro-area economic sentiment in February rose to the highest in more than 2 1/2 years.
The U.S. may expand 2.7 percent this year, according to a Bloomberg survey of 99 economists. Manufacturing output rose at a 4.6 percent annualized pace in the fourth quarter, before harsh winter weather led to a 0.9 percent reduction in January, the biggest drop since May 2009. Production rebounded 0.8 percent in February, gaining the most in six months. In Europe, a gauge of services and manufacturing production last month reached the highest since June 2011.
Copper prices lost 7 percent in 2013 even as U.S. manufacturing rose 2.2 percent and builders broke ground on 18.7 percent more homes, bringing total housing starts to a six-year high. Construction accounts for about 40 percent of copper use, with a typical home containing about 439 pounds. Spending on all construction projects rose 4.9 percent to $899.2 billion, the most since 2009. The share of U.S. global copper use sunk to 8.8 percent at the end of last year, compared with 15 percent in 2003, according to World Bureau of Metal Statistics data compiled by Bloomberg.
China’s share of world copper demand has more than doubled to 47 percent in December from 20 percent in 2003. The U.S. and European recovery “matters little” for copper, a China-driven market, according to Ken Hoffman, global head of metals and mining research for Bloomberg Industries.
Traders are “very nervous” about China, said Hoffman, who is based in Princeton, New Jersey. Industrial output, investment and retail-sales growth in China cooled more than forecast in the first two months of 2014, and two manufacturing indexes declined in February. The Chinese economy will grow 7.45 percent this year, the weakest pace since 1990, according to 48 economists in a Bloomberg survey.
The Chinese government is trying to rein in rising credit, lower overcapacity and protect the environment from industrial pollution while moving to a more consumption-based growth model. As China makes these changes, that creates “some tremors in the global economy,” billionaire investor George Soros, 83, said in a Bloomberg Television interview with Francine Lacqua in London on March 12.
“It’s very much a specific copper-China story rather than a global economic warning signal,” said Caroline Bain, a commodities economist at Capital Economics Ltd. in London who wrote “The Economist Guide to Commodities.” “Our growth story at the moment is for quite strong growth in the U.S., and we don’t really feel that copper is going to be a good reflection of that.”
Shifts in the economy’s makeup have reduced the role of industrial commodities, including copper, as indicators of growth and inflation, according to Greenspan, 88, who was Fed chairman from 1987 to 2006. Services account for 87 percent of U.S. economic output, compared with 72 percent in the early 1950s, shrinking the share of manufacturing to less than 13 percent from 28 percent, Commerce Department data show.
“In the 1950s and 1960s, when timely data on industrial trends were lacking, I found copper prices a very useful proxy,” Greenspan, whose first job in 1948 was analyzing metals demand for the National Industrial Conference Board, said by e-mail. “That, of course, is less so today. But I still cannot resist checking prices on both the London Metal Exchange and Comex on a daily basis.”
Some economists contend copper is sending a signal that growth will slow. U.S. inflation expectations have dropped 12 percent over the past 24 months. Deflation risks are climbing and may prove “disastrous” for the recovery, IMF Managing Director Christine Lagarde said in January.
Deflation, which is a weakening in general price levels, makes products cheaper for consumers and spurs lower wages, damping spending and making it more difficult for governments to raise the money needed to pay down debt. In China, producer prices fell for a 24th month in February, adding to evidence that the world’s second-largest economy weakened last month.
“The latest day-to-day gyrations aren’t the main concern, rather the real issue is a global industrial growth downturn,” Lakshman Achuthan, the co-founder and chief operations officer of the Economic Cycle Research Institute, said in an e-mail, citing the drops in U.S. and euro-area industrial output. “While overall economic growth prospects vary from country to country, industrial growth outlook remains generally poor.”
Policy makers around the world unleashed unprecedented monetary stimulus after the financial crisis of 2008 in an effort to revive economies amid the most-severe global recession since World War II. Now, central banks are “stepping on the brakes,” and there may be more weakness ahead, according to Achuthan.
The Federal Reserve, which has held interest rates at near zero since the end of 2008 and flooded the economy with more than $3 trillion since the financial crisis, has cut back on monthly bond purchases to $55 billion from $85 billion in November. Policy makers yesterday predicted target interest rates would rise to 1 percent by the end of 2015 and to 2.25 percent a year later.
‘One Thing Only’
The massive decline in copper is “telling you one thing and one thing only, and that is excess stockpiles in China,” according to David Rosenberg, the Toronto-based chief economist at Gluskin Sheff & Associates, which manages about $6.8 billion.
Stockpiles tracked by the Shanghai Futures Exchange have climbed for nine straight weeks, the longest advance since February 2012, up 75 percent since early January to 213,297 metric tons, data compiled by Bloomberg show. Inventories in bonded Chinese warehouses reached 750,000 tons as of Feb. 28. Orders to remove copper from warehouses tracked by the London Metal Exchange have fallen 50 percent this year to 121,925 tons.
Global production will rise to 22.26 million tons this year, from 21.052 million tons a year earlier, Barclays Plc forecast on Feb. 12. That will leave a surplus of 81,000 tons, compared with a 175,000-ton deficit in 2013, the bank said.
Copper has declined the most among the six main metals traded on the LME, the largest metals exchange. Chinese exports slid in February by the most since 2009, government data showed on March 8. Global consumption of the metal will trail production by 81,000 tons in 2014, after a deficit of 175,000 tons last year, Barclays Plc said on Feb. 12.
The sell-off “seems overdone,” London-based Barclays said in a report on March 14. Buying copper is attractive at these lower prices, the bank said.
China will consume 10.02 million tons of copper this year, up 7.5 percent from 2013, Barclays projected in a Feb. 12 report. That compares to 2.32 million tons consumed in North America in 2014, and 3.59 million in Europe, the bank said.
Aggregate financing in China plunged 64 percent to 938.7 billion yuan ($152 billion) in February from a month earlier, signaling a slowdown in so-called shadow banking, which allows banks to bypass controls and capital requirements. The financing alternative has evolved over the past three years from underground lending among individuals and small companies into a complex and interconnected web.
JPMorgan Chase & Co. estimates the lending to be valued at $7.7 trillion and said the practice involves the nation’s biggest banks, state-owned firms, local governments and millions of households. Tightening credit from the crackdown may mean that demand for metal in financing transactions will shrink. China had its first onshore bond default after Shanghai Chaori Solar Energy Science & Technology Co., a solar-panel maker, failed to make an interest payment due on March 7.
Imports continue to flood the market in China and weaker onshore prices prompted smelters to send their supply to bonded warehouses, exacerbating to the stockpile overhang, Barclays analysts including Sijin Cheng wrote in a report on March 11. Widening import losses, combined with the weakening of the yuan, damped the appetite for financing, Barclays said.
Copper’s decline is “all about China,” said John Stephenson, who helps oversee about C$3.1 billion ($2.8 billion) at First Asset Investment Management Inc. in Toronto. JPMorgan, Bank of America Corp. and UBS AG cut their forecasts for Chinese economic growth this year.
“In general, copper has been a good barometer for the global economy, but in the last decade or so, with China reaching this ascendancy in terms of being the mecca of copper, the China story matters much more,” Stephenson said in a telephone interview. “With all due respect to copper, it’s probably lost its right to be considered a Ph.D. in economics from a forecasting perspective.”