By Ambrose Evans-Pritchard, Nov 23, 2015
‘Dr Copper should be struck off the list. He is telling us a lot about over-supply in China, but little about the world economy,’ says Capital Economics.
Copper prices have crashed to their lowest level since the Lehman Brothers crisis and industrial metals have slumped across the board as a flood of supply overwhelms the market.
The violent sell-off came as the US dollar surged to a 12-year high on expectations of an interest rate rise by the US Federal Reserve next month. The closely-watched dollar index rose to within a whisker of 100, and has itself become a key force pushing down commodities on the derivatives markets.
Copper prices fell below $4,500 a tonne on the London Metal Exchange for the first time since May 2009, hit by rising inventories in China and warnings from brokers in Shanghai. Prices have fallen 32pc this year, and 55pc from their peak in 2011 when China’s housing boom was on fire.
Known to traders as Dr Copper, the metal is tracked as a barometer of health for the world economy but has increasingly become a rogue indicator. China consumes 45pc of the world’s supply, distorting the picture. Beijing is deliberately winding down its “old economy” of heavy industry and break-neck construction, switching to a new growth model that is less commodity-intensive.
“Dr Copper should be struck off the list,” said Julian Jessop, from Capital Economics. “He is telling us a lot about China and the massive over-supply of copper on the market, but he is not telling us anything much about the economy in the US, Europe or the rest of the world.”
The CPB index in the Netherlands shows that global trade began to recover four months ago after contracting earlier in the year, and the JP Morgan global PMI index for manufacturing has risen since then to 51.3 – well above the boom-bust line.
The trigger for the latest plunge in copper prices was a decision last week by the Chilean group Codelco to slash its premium for Chinese customers by 26pc, effectively launchng a price war for global market share. “We’re trying to lower costs. We’re not cutting production,” said the group’s chief executive, Nelson Pizarro.
Glencore has already said it will suspend output in Zambia and the Congo for two years until new equipment is installed, and others are doing likewise. But Codelco is the key player.
Kevin Norrish, at Barclays Capital, said Codelco is in effect copying Saudi Arabia’s tactics in the oil market: using its position as the copper industry’s low-cost giant with a 10pc global share to flush out the weakest rivals.
The price war comes as the expected revival of Chinese metal demand disappoints yet again. Warehouse stocks in Shanghai have risen to their highest in five years, though LME inventories have been falling since September.
Views are starkly divided over the outlook for copper, as it is for the whole nexus of commodities. Goldman Sachs says the demise of China’s “old economy” will lead to a near permanent glut through to the end of the decade.
Natasha Kaneva, from JP Morgan, said it would take another one to two years to touch the bottom of the mining cycle, predicting further price falls of 12pc-28pc. “We remain bearish on all the base metals,” she said.
But the International Copper Study Group is sticking to its guns, insisting that there will be a global copper shortage of 130,000 tonnes next year.
What is clear is that the commodity rout has taken on a life of its own, with financial flows and speculators reinforcing the crash. Nickel, lead, zinc and aluminium have all plunged over recent weeks, tracking the parallel drama in oil and gas. Even soybeans and wheat have fallen by roughly 40pc since May.
Commodity crashes are a dangerous warning signal if global demand is falling. But they are benign if caused by excess supply, acting as a shot of stimulus for most of the world, or a “positive supply shock”, as it is known.
Peter Praet, the European Central Bank’s chief economist, said the jury is out on this point, warning that a “significant part” of the latest slump appears to come from weak demand and therefore needs watching carefully.
Yet the current circumstances are nothing like mid-2008 before the Lehman crisis, when most commodities were reaching fresh highs even though the money supply was already buckling in the US, Britain and the eurozone. Some economists argue that it was the oil shock of June and July 2008 that ultimately caused the financial crisis three months later.
This time the picture is inverted, with global real M1 money growing at the fastest pace in 30 years, potentially setting off a strong economic recovery.
Harvard economist Carmen Reinhart said commodity busts typically run for seven years as it takes time to clear the tidal wave of supply from over-investment during the boom. If the historical pattern holds, we are only half-way through. “This commodity-price roller-coaster ride is probably not over yet,” she said.