The price of copper is often referred to as “Dr Copper”, due to it’s apparent ability to confirm and predict the health of the global economy. Let’s have a look at what is behind this, and what it is currently signalling.
The copper price is a macro variable that is widely followed, due to its direct links to the global economy. Copper is a one of those fundamental raw inputs used across a wide variety of industries and products, and is used in a wide range of applications in both electrical equipment and industrial production. The Copper Development Association (CDA) estimates that around 65% of the global copper production is used by the electrical sector, with 25% industrial and around 10% in transportation and other areas. Studies have shown strong statistical correlations with copper prices and global trade and GDP.
Have a look here at the chart of the copper price and the ISM (US business cycle). As you can see, there is a pretty obvious correlation here, and as the copper price is daily (and the ISM only comes out monthly) it can also provide some short term insight into the likely direction of the next ISM print (although you would not use this in isolation.
Generally speaking, as economic growth increases there is more demand for copper with its wide range of applications, and hence more demand generally means higher prices (subject of course to any intermittent supply side issues). A strong, rising copper price is seen as bullish for risk assets, as it generally means the global economy is growing.
The recent surge in copper prices is confirming the outlook for the ‘reflation’ macro regime (both currently, and into the first half of 2021). This is the regime that is bullish for risk assets such as shares and commodities. Note strong copper prices also tends to correlate with strong returns in emerging markets shares.
Author: Graham Parkes
Issued by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec).
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