Because commodities make up around a quarter of global goods exports, prices tend to rise when world trade is growing. The same is true in the reverse: lackluster economic activity due to subdued investment and consumption leads to falling demand for commodities. The net effect crops up in prices, which take a dive as a result. Metal prices have proven especially sensitive to these changes in trade behavior. What’s more, Wise finds that these wield short-term predictive power:
The relationship between base metals prices and future growth has at times proven so robust that one in particular—copper—goes by the moniker Dr Copper for its precision in forecasting the next up- or downturn.
Dr Copper’s current prognosis is rather grim. Since its June peak, prices have fallen 14 per cent:
Before reading too deeply into copper’s recent slide, we should note that global growth in the aggregate is not the sole driver of metal-price moves. It’s for this reason that the relationship has broken down in the past. In the period between 2012-2015, for example, the relationship between metal prices and world activity turned negative. Wise highlights that divergence in a chart tracking the 3-year rolling correlation:
One factor is the dollar. Because commodities are largely dollar-denominated, a rise in the greenback’s value relative to other currencies makes metals, oil and other materials more expensive for consumers living outside of the US to buy. Since February, the dollar has strengthened nearly 7 per cent.
What happens in China matters, too. Last year, the Middle Kingdom builtseven times more skyscrapers (with heights 200 meters or more) than the United States. That level of production makes it the world’s largest consumer of many metals and commodities. In fact, China comprises about half of the global demand for steel, nickel, copper and aluminum.And in terms of production, it’s the world’s largest aluminum producer and the third-largest for copper, behind just Chile and Peru. China’s economy, then, has outsized influence on the strength of metal prices. In recent weeks, an index tracking base metal prices (LMEX) has declined almost in lockstep with the renminbi, which now hovers near one-year lows. From Société Générale:
Beyond China, the French bank sees escalating trade tensions weighing on sentiment. They downgraded their price forecasts for a range of base metals, given the uncertainty sowed by President Trump’s tariff tit-for-tat. The Federal Reserve reports that some executives have already acted on their concerns about trade policy:
Contacts in some Districts indicated that plans for capital spending had been scaled back or postponed as a result of uncertainty over trade policy. Contacts in the steel and aluminum industries expected higher prices as a result of the tariffs on these products but had not planned any new investments to increase capacity.
Tensions may ease, considering President Trump’s recent about-face with European Commission President Jean-Claude Juncker.
Citigroup is certainly hoping they do. “Prepare for a decade of Dr. Copper on steroids,” write analysts in a recent note. The metal, they say, is getting much more difficult and expensive to mine, and given the increased pace of urbanisation and growing demand for electric vehicles (for which copper is a key input), they predict prices will top $8000 per metric ton by 2022. That’s a 27-per-cent increase from today’s levels.
They add one caveat, though. If a full-blown trade war takes shape, copper will fall “materially lower before it goes higher again.”