AFor large traders, the price of copper is often viewed as predictive of other growth-prone markets. Indeed, its diagnostic and predictive properties are such that it is often referred to as “Doctor Copper”. The metal is used in many industrial and construction applications, so price swings as demand fluctuate can be early indicators of economic strength or weakness. However, we should never forget that there is also a supply side to that price comparison, and we’ve all been reminded of that in no uncertain terms in recent years.
That makes interpreting movements in copper a bit more nuanced today than in most cases in the recent past. But it remains a valuable exercise. In fact, you could argue that it’s more rewarding now than ever, given the importance of inflation right now and copper’s fundamental place in input costs for a wide variety of companies. If nothing else, it’s worth analyzing the copper market because doing so will send a much-needed glimmer of hope as the stock market tumbles.
That glimmer of hope comes from the slump from the March highs.
Since the pandemic lows of early 2020, copper has rebounded sharply to well above the highs of 2019. In part, that’s due to a recovery in demand, but the overrun indicates that this is largely due to supply constraints. Demand has recovered strongly, but the economy is not 50% bigger than it was in 2019, and demand for copper probably isn’t either. For the price to move from the pre-pandemic high around $2.80 to the current $4.20, there must be some sort of supply problem. Of course, that’s not news to anyone and it’s not limited to copper either. We have heard to nausea about supply chain issues for months on almost everything we do and buy. The slump in copper suggests that these problems may be abating.
So far, other commodities have not retreated to the same extent. Most grains are at or near their peak; oil is also below its March peak, but has stabilized at high levels; and others, such as cotton and natural gas, still seem to be rising. However, if we accept Doctor Copper’s diagnostic and predictive role, the metal’s pullback should signal the start of a correction for commodity prices in general, and thus a reduction in inflationary pressures. That matters, of course, because the current market decline has been driven by concerns about inflation, and how much damage the response of the Fed and other central banks to that inflation will do to economic growth.
Fed Chair Jay Powell spoke on the subject yesterday, saying he couldn’t guarantee a “soft landing” for the economy and that perhaps they should have started raising interest rates sooner. Actually, that’s an admission of guilt, but if the dip in copper is maintained and indeed predictive, Powell’s blushes could be saved somewhat and his blunder might not look too bad by the end of this year. He will be mocked for of course changing course at the worst possible time and doing it wrong both ways, but if price pressures start to ease, at least he can move to more gradual rate hikes and do some less damage.
When we get in touch with Doctor Copper, there’s a hint of good news. It is still early days and the drop could just be normal volatility based on technical factors. However, copper is down 15% in the past month and is in a steep downtrend. That suggests the move will be more likely based on supply and demand fundamentals and, if it turns out to be the case, other commodities are likely to follow. That’s a lot of ifs and and buts – that said, the results of the doctor’s examination are encouraging.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.