“Dr. Copper”: 3 reasons behind the 30% drop in the price of copper (and why it’s a key indicator of global economic health)

Fears of a global economic recession are hitting the price of copper, a metal that economists use as an indicator of global economic direction.

The drop in its price (nearly 30% from its March high) could “move forward” what’s to come in the future, because copper is used in so many industries, that when its demand declines, worries about a decline in global industrial activity increase.

Copper is an essential metal in the energy sector, transport, electrical networks, telecommunications, construction, health and in all the technological devices that we use daily, such as mobile phones and computers.

As this metal allows experts to make projections on industrial activity, it has been baptized “Dr Copper”.

“Dr. Copper is in the hospital”, Ben Laidler, global markets strategist at consultancy eToro, pointed this out.

“Copper prices fell a third from their March peak, double the broader decline in commodities, under the weight of growing fears of recession, a difficult Chinese recovery and a US dollar rebound,” Laidler told BBC Mundo.

Despite the above, he adds, “the long-term outlook remains optimistic.”

In Latin America, the main copper exporters are Chile and Perucountries that generate 40% of world production.

And as the metal hit its lowest price in nearly 20 months, these countries are worried about the impact the collapse could have on their economies.

Here are three reasons that help explain the fall of the red metal on the international market.

Market operators anticipate difficult times. In the current situation, one of the main fears is that a possible recession in The United States ends up driving much of the global economy.

“These expectations stem from the difficulty the authorities have had in maneuvering in an environment of high inflation and weak growth.“, explains Juan Carlos Guajardo, founder and executive director of the strategic analysis company Plusmining and former director of the Chilean Copper Commission (Cochilco).

Raising interest rates is a tool for controlling inflation, but it has a cost: it reduces growth.

That’s why the United States and many other countries are torn between what to do to stop the rising cost of living while sustaining economic growth.

For now, the Federal Reserve (equivalent to the Central Bank of other countries) should continue to raise interest rate (the cost of money) during that year.

Added to this scenario is the energy crisis in Europe (derived from the war in Ukraine), which further complicates the outlook for this year 2022.

The second quarter was not good for the Chinese economy. Indicators that reflect the Asian giant’s economic health have shown the effects of the restrictive zero covid policies enforced by the Xi Jinping government.

Gross domestic product (GDP) rose just 0.4%, its slowest pace in two and a half years. Strict lockdowns in different parts of the country, and especially in Shanghai – the financial heartland where the world’s largest cargo port is located – have taken their toll.

The negative impact of this policy on exports and consumption precipitated a slowdown that affected the Chinese economy.

Moreover, doubts persist as to the impact that the housing market crisis could have and how it could affect the strength of the dollar.

“Demand for durable goods has started to ease,” Guajardo says in a dialogue with BBC Mundo.

We are talking about goods which, once acquired, can be used a large number of times over time, that is to say that they are not consumed quickly. Among them, cars, furniture, household appliances or houses.

On the other hand, there is the inventory cycle which refers to the amount of inventory that companies have.

The start of the war in Ukraine caused an increase in stocks for fear that the war would take on large dimensions.

Basically, when there is fear, you save.

“But as the outlook now indicates that war is a long-term conflict, many are looking to reduce their inventory“, says the economist.

Another relevant factor is that investment funds that manage huge amounts of money have “very high short positions”which means in practice that they are betting on lower copper prices compared to what is happening with other commodities.

Although the price of copper has fallen by almost 30% in recent months (with a more pronounced drop from June), experts believe that, for the end of the year, the average price should be positive.

It all depends on the development of the international economy because it is impossible to predict exactly how much the United States will raise interest rates, how much China will contract, what will happen to the energy crisis in Europe and whether predictions of a recession will come true.

The great strength of the dollar against many currencies around the world does not help either, which also hits Latin American currencies hard, especially in countries like Argentina, Chile and Colombia.

In the long term, experts point out, it is expected that there will be greater demand for the metal. red on background energetic transition towards the use of renewable energies that require intensive use of copper, thanks to its unique combination of high conductivity and relatively low cost.

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