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

Includes: BHP, FCX, RIO
by: Wildebeest

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.
US copper consumption
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 show real GDP over the last 20 years.
GDP from
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.LME copper
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.
Shanghai copper
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