By SIMON CONSTABLE
Dr. Copper is signaling that more danger is ahead.
Copper, which is consumed for a wide variety of uses including manufacturing and construction, is said to have a Ph.D. in economics because of its ability to forecast economic activity. Hence the Dr. Copper moniker.
When prices of the red metal drop it often presages slower economic activity and lower stock prices. Benchmark contracts for copper have tumbled from around $3.38 a pound at the beginning of the year to about $3.00 recently. But that's only part of the story.
"What really highlights the move with copper is the divergence with other commodities," says Ashraf Laidi, chief global analyst at City Index, in London. He notes that copper prices have sunk while the Thomson Reuters/Jefferies CRB Commodity Index has surged. Eventually the prices of the other commodities will catch up and fall as the economy weakens, he argues. Why?
Laidi has studied similar patterns looking back 20 years to determine the relationship between the CRB and copper price. He saw similar divergences (copper falling ahead of other commodities prices) followed by problems in the economy multiple times. A divergence in 1997 was followed by the Asian financial crisis; one in 1999 preceded the dot-com bust; the one in 2007 came ahead of the housing bust.
Copper prices have actually been falling faster than those of other commodities since around February 2013. This may augur more weakness in China, which consumes a lot of copper for its vast infrastructure projects.
However, some analysts say the use of metal inventories to help with financing deals is part of the reason copper prices are down.
Recently China saw the first default in its corporate bond market, which has led some observers to worry that a "financial sector clampdown will force copper inventories to be liquidated," according to a recent research report from Barclays. "Feedback from our meetings in China [in early March] suggests that the worst may be over (or close to it)."
Still, Laidi is skeptical. "When something happens again and again and again, the reasons may be different, but we have to deal with the consequences," says City Index's Laidi.
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