What Does Dr Copper Tell Us About Global Growth?
Weakness in Copper persists, and it shows the risks to optimistic global growth and inflation expectations.
This weakness is down to a number of reasons:
Copper is the commodity that is most linked to industrial production. Copper price is a good indicator of the global economy as fluctuations in price are usually determined by industrial demand. Given that Chinese demand represents approximately 50% of global copper demand, the slowdown of its economy has a big impact on the price.
Additionally, many of the low-quality loans in China use copper as collateral, up to 30% according to HSBC, as it is an indicator of industrial activity and closely linked to Chinese growth. When the market begins to question the debt repayment capacity of many Chinese companies, margin calls are triggered and copper falls with it.
It is a double impact: Financial and demand-led. What was supposed to be a good hedge is actually a double risk on the economic slowdown.
Lower demand growth, persistent overcapacity.
The estimated surplus of refined copper was recently revised up, despite some moderation in production.
According to Platt’s:
The global refined copper market saw a surplus of around 165,000 mt in the first quarter of 2017, according to preliminary data released Tuesday by the International Copper Study Group.
“This is mainly due to [a] decline in Chinese apparent demand,” analysts with the Lisbon-based research firm said in a report. China currently represents 47% of the world copper refined usage.
Factoring in changes to private, unreported copper stocks in China, the first-quarter surplus rose to about 310,000 mt, it said.
Chile accounts for c34% of the world’s copper production, approximately 19% of the revenues for the country. USA is the fourth largest copper producer in the world, after Chile, Peru and China, and Australia is fifth. All these countries are producing at peak levels, and a small decrease of 3.5% year-on-year has failed to address the surplus.
In terms of demand, China accounts for c50%, followed by Europe 17%, other Asia 15%, U.S. c8%, Japan 5%. The rest are minor consumers.
Risks to demand estimates for refined copper in China, despite improved European indicators, mean that overcapacity increases. Current demand growth estimates are factoring a stronger US economy and a large infrastructure plan that is curtrently at risk of being severely delayed.
Refined copper overcapacity has remained since 2014, and calls for a “next year market balance” have been incorrect. China has seen its stockpiles of copper grow and it is looking to start exporting, just as supply continues to exceed demand.
Structural overcapacity and downward revisions of demand growth are the main drivers of the weakness in copper prices.
In summary, what Dr Copper is telling us loud and clear is that the infamous “reflation theme” that mainstream analysts have defended is simply incorrect, and that excessively optimistic expectations of global growth and inflation have to be revised down.
Daniel Lacalle is Chief Economist at Tressis SV, has a PhD in Economics and is author of “Escape from the Central Bank Trap”, “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)
Picture courtesy of Bloomberg
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