Global Implications of Copper's Dramatic Rise

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Includes: COPX, CU
by: DayOnBay

By: Chester Lau

On October 13, the entire world held their breath as Florencio Ávalos emerged from a 53 cm width capsule that lifted him 622 meters – almost as high as two stacked Eiffel towers – from the depths of a San Jose copper mine. It had been almost three months since the 33 trapped miners had felt the chilly night air of Chile’s Atacama Desert.

Watched by over 2000 journalists across the globe, the rest of the miners emerged to the surface one by one over the lengthy 22 hours of the rescue operation. The Fenix 2 (Phoenix) was the name given to the miraculous rescue capsule that was equipped with three hours of air supply and a harness to hold the men in place during the extremely dangerous rescue process. Representing the mythical bird that arose from the ashes, the phoenix symbolized the rebirth that the miners would experience upon being lifted to the surface after over 1440 unending hours of isolation.

After nearly two years of an economic stagnation, the world is now eagerly awaiting a recovery. Prior to the meltdown, speculators watched an unusual rise in commodity prices, convinced they were caught up in a “commodity super cycle” that was being exacerbated by emerging-market industrialization. The rise and eventual fall of the financial sector was paralleled by the sharp increase and subsequent reversal of internationally traded primary commodities.

Similarly, the current perception of an economic recovery has coincided with growth in the commodities sector. In particular, copper has been making an impressive run. The industrial metal has long been held as a reliable advanced indicator of economic expansion. There is confidence growing within the market that the world is on the cusp of an economic rebound through increased demand for raw materials (often a precursor for the broader recovery in consumer demand) and economic growth.

Analyst Pierre Lapointe of Brockhouse Cooper stated: “If demand for copper is growing, the world economy must be growing as well;” on the same day, copper hit a 27-month high of $3.79 (U.S.). Copper has long had a reputation for being an indicator for economic growth due to its wide variety of uses within segments of the economy – electronics, communications, homes, and commercial construction, to name a few. Stocks have begun to follow suit with copper’s growth, illustrating a turnaround within the stock market, convincing many to foresee a similar outlook for the economy as a whole. Many speculators, however, have been debating what has actually fuelled copper’s unprecedented rise, and whether copper’s recent surge is an actual relief in the fear of a double-dip recession.

China, the Copper Hoarder

There seems to never be enough of any commodity in the case of China, and copper is no different. As disaster stopped copper production at Escondida, the Chilean hole that was the world’s biggest copper mine, the global output of copper started to sag. China, on the other hand, has been scraping pennies from every corner of the earth due to its continuous boom in construction. Convinced that the world is caught in the unhindered escalation of commodity prices, China’s State Reserve Bureau (SRB) mopped up over 300,000 tonnes of copper surpluses last year, when the financial crisis was at its worst and commodity prices had plummeted to their lowest.

Since then, demand for base metals has recovered, and copper markets have begun to tighten as miners struggle to meet the predicted soaring demand in 2011. It has been estimated by the Financial Times that the SRB has made profits upward of $1.5 billion (U.S.) with the recent rise of copper prices. Evidently, China has bet that the “super-cycle” of high metal prices would survive the effects of the financial crisis through the strengthening of developing emerging economies.

With China being the poster child of emerging market growth, many experts believe that it is the rebound in demand from China, the world’s biggest consumer of copper, and thus other emerging market economies, that has fuelled the metal’s recent price-spike.

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China’s copper imports have risen over the past year. Other fast-growing emerging economies, such as India and Brazil, have followed the mad rush to stock up on copper, further contributing to the slide in copper inventories throughout the year, and their steady increase in value.

Has the Phoenix Landed?

With the American and European Union consumer debt laden, expected growth rates are anaemic. Also, governments around the world have continued living beyond their means by further printing money to pay for fiscal stimulus packages, making “quantitative easing” the new catch phrase in what is becoming a very acceptable form of government intervention. As investors see the value of their currency take a dip, many have moved into hard assets that will retain their value in the future.

Looking at the recent upward trend of some base metals including copper, one can see that the recent rise corresponds with announcements by the Federal Reserve Board on a further round of quantitative easing. In a final attempt to spark consumer demand after slashing interest rates had failed, the Fed has primed the pump once again in hopes of creating some very necessary inflation. With the devaluation of the dollar, and the subsequent propping up of commodity prices, this has signalled for many that the real driver behind copper is not a recovery demand, but fear of the effects of increases in money supply and the devaluation of the American currency.

Ready to Soar

Even if the recent round of quantitative easing has acted as a catalyst for the rise in commodities, the rebounds of many base metals and specifically copper presents a bullish outlook for the rest of the economy. With copper and the stock market being lead indicators of a very possible economic recovery, a continued rise in the metal’s price will prove bullish. And considering the economic realities of emerging-market economies, and their continuous appetite for commodities, it is clear that the BRIC countries and their peers will continue to push up copper prices.

The mythical phoenix has already spread its wings for flight, and just like the Fenix 2 that gave a sense of rebirth for the 33 Chilean miners trapped below the surface for over two months, the recent rise in copper also demonstrates for many that the world is finally inching out of its deepest economic woes.

Further Reading

Disclosure: No positions