Copper's View of the Recovery: No Real Growth This Year

Copper is considered a bellwether metal, so what is it telling us about where we're headed and what can it tell us about where we've been?

With the latter I'm thinking back before the crash. Copper consumption has been falling all decade in the USA. About two weeks ago, the International Copper Study Group (ICSG) forecast consumption in the USA, Europe and Japan to be down approximately 17% this year. While a decline would be expected by everyone this year, it is actually only amplifying an 8-year trend as we can see in the chart below.

If copper is a bellwether metal, and consumption has been falling in the USA the entire decade, how can that be? One explanation is that GDP growth, using the official numbers, has been illusory. If we were to use the GDP numbers with imaginary non-cash items like imputations and hedonics stripped out, we see that GDP growth has been negative for most of the decade. The chart below from ShadowStats.com show real GDP over the last 20 years.

So Dr. Copper is reflecting the real economy and where we've been. How about the future? If you were to focus solely on price charts, things would look rosy, but this would be to ignore the effect of a weak dollar and speculative money flowing into metals markets. In the real economy the trend doesn't look good.

Warehouse stockpiles can be used as a proxy for demand. If supply is constant we should expect to see stockpiles decrease during periods of increased demand and vice versa. In the next chart the disconnect between stockpiles and price is evident. The stockpiles also need to be interpreted in the context of capacity utilization rates among miners being at their lowest since 1989 and supply for 2009 predicted to be down by 0.8%. In other words stockpiles aren't rising because of increasing supply.
The drop in warehouse stocks from March through to the end of June occurred as China stockpiled copper. We know this from data on Chinese imports over the period and we suspect stockpiling rather than usage because copper stockpiles have been rising in Shanghai.

So what does this mean for the future? Price will presumably continue to be strong while rates are near zero and the dollar is weak, but price is not reflecting the real economy and it would be incorrect to draw economic conclusions solely from price charts. The trend continues to be rising stockpiles signaling weak demand. Absent another China stockpiling splurge, supply continues to exceed demand. Producer bodies are forecasting an increase in the copper surplus in 2010 due to a combination of increased supply and weaker demand. In other words, Dr. Copper is not seeing real economic growth in the next 12 months.

Disclosure: Long BHP

Comments

[Mad Hedge F...:]

mge Last February, I told you I would kill myself if you didn’t buy the world’s largest copper producer, Freeport McMoRan (FCX) (click here for the call at www.madhedgefundtrader... ). OK, I exaggerate. I said I would throw myself in front of a train. Who knows, I might have survived the train. Since you all followed my advice, you are all now as rich as Croesus, as the stock has since gone parabolic, from $15 to $85, up 560%. Providing the rocket fuel for this move was copper’s leap from $1.25 to $3.00. CEO Richard Adkerson is the kind of burly, no nonsense kind of guy you might expect to find in an afterhours bar near one of the many open pits the company works around the world. Although Q3 revenues fell from $4.6 billion to $4.1 billion YOY, FCX has reinstated its dividend, and is clearly back in the catbird seat. China is importing record amounts of copper both for stockpiling and consumption by it explosively growing auto, consumer, infrastructure, and power industries. Record gold prices, which FCX also mines, are giving a further boost. Projects mothballed last year are back on track, and idle equipment is going back to work. When I was at Morgan Stanley during the eighties, any association with the red metal was considered career death, as it was in the grips of a 20 year bear market, trading as low as 60 cents. The guy who covered our big client in the sector was nice enough, but people avoided his table in the company cafeteria in the GM building like he had AIDS. I have to pinch myself when I see copper’s performance today. I wonder where that guy is now?

Oct 28 05:49 PM

[ArizonaGlen:]

A big factor in the decline of copper this decade might be that copper has largely been replaced by Pex in water supply piping applications, especially in residential. Because of this I don't think copper is necessarily a proxy for determining underlying economic growth. The current climb in copper prices is largely due to Chinese stockpiling of the metal at cheap prices.

Oct 28 07:37 PM

[untrusting ...:]

Good article with helpful data. Thanks for posting it.

Oct 28 07:59 PM

[CanadianInv...:]

Also consider to that a lot of manufacturing has also been shifted to China, resulting in the copper still coming back in a finished product.

I would think the pex pipe example by ArizonaGlen could have a larger effect than many would believe. I have seen the transition in the last 10 years, and construction is a major part of the economy.

Oct 28 09:49 PM

[Wildebeest:]

@CanadianInvestor
@ArizonaGlen

I'll see what data I can find on substitution. Note that the decline in usage began at the start of the decade when copper was selling under $1 lb. I don't see incentive for substitution at those prices unless it was mandated by city building codes. While copper prices rose steeply from 2004, so did oil prices. Intuitively higher oil prices should have led to higher pex pipe prices. So I'll be interested to learn the extent of substitution.

Oct 29 08:16 AM

[Michael Clark:]

The Real GDP chart above shows pretty clearly that this Great Depression began in 2001. All the money pumping has been an attempt to deny reality; and it is not working; it's only getting the world in more and more debt. More and more debt = more and more defaults = more destruction of matter = deflation.

Oct 29 12:09 PM

[SeekingTruth:]

When I was having some repair work done several months ago, my plumber said that he had stripped all the copper out of his house and replaced it with PEX for the its anti-freeze damage qualities.
Don't know if that means much, but if I were building a new house again, with cost analysis ,etc. I would definitely consider PEX instead of copper, but based on analysis of course.

Oct 29 10:28 PM

[Wildebeest:]

@CanadianInvestor, @ArizonaGlen (if you return back to this post)

Here is what I have found about "Plumbing Tube and Pipe" which seems to be the copper category what you're both referring to:

Copper pipe as a % of total copper products from 2000-2008
7.7, 8.9, 9.4, 9.3, 9.0, 9.2, 7.5, 7.2, 6.4

You may notice that copper pipe % decreases but also remember that total copper is decreasing. It turns out that from 2005-2008 copper pipe usage halved (after increasing slightly from 2000). -- consistent with your observations. The falls in copper pipe usage is greater than other areas but nevertheless the falls are across the board, eg, in all sorts of wire, foils, sheets, and so on. So substitution of pex pipe explains some of the decline but only a few percentage points.

Oct 31 12:51 PM