Dr. Copper
Copper is one of the most important industrial metals in the world, and its price development can tell a lot about the conditions of the world economy
One often hears economists refer to copper as "Doctor Copper, the metal that has a Ph.D. in economics." This is because of the red metal's central role in so many sectors of the economy. Household items, buildings, power generation and distribution, computers, electronics, and electric cars are full of copper. Numbers from the organization Copper Development Association (2021) showed that approx. 46% of the world's copper consumption that year went to building construction, 21% to electricity, 16% to transport and 17% to consumer products and industrial equipment/machinery.
An observant reader will rightly say that it is not so easy to distinguish between some of these categories, and that is a good point. One can simply say that products and activities that involve making, transporting and using electricity very often use copper. You have copper wires in your house, your electric car is driven forward by coils of copper, and the PC I am writing this on has both internal wiring and microchips full of copper.
Copper is used alone, or in combinations (alloys) with other metals. Depending on how they are fused together, the resulting alloy can have a long life, very good electrical conductivity, and/or great mechanical strength. Historians assume that copper was the first metal to be mined and remelted by humans, and that it has been with us for 10,000 years. If you melt copper and tin together, you get bronze, which is a harder metal mixture than either of the two separately. The spread and use of this metal has given its name to the "Bronze Age", which was an important step in humanity's development between the Stone Age and the Iron Age around 2500-4000 years ago.
To this day, copper is with us almost everywhere where there is human activity. New products for consumption, or new investments in buildings, machines and other infrastructure involve the use of copper. That is why the metal is called Dr. Copper and its price development becomes a relevant indicator of whether the speed of the economy is on its way up or down.
What does the copper price tell us now?
The technical picture for the copper price looks a bit lackluster, which fits relatively well with the somewhat lukewarm attitude many macroeconomists currently have towards growth in the world economy. The chart below shows the price development of copper futures over the past 5 years. We see a somewhat downward trend from a peak in May 2018 towards a preliminary bottom in spring 2020 during the Covid-19 unrest. The copper price then recovered strongly along with many share and commodity markets until the first half of 2021. Copper set a provisional last peak in March 2022 and is at the time of writing down 10.5% last year and 1.6% so far in 2023.
The last significant price signal was a sharp drop last week that sent the price below its 40-week (200-day) moving average. This is a negative technical signal, and unless copper quickly recovers above the 8,500 level (USD per ton), technicians will expect further weakness.
How to trade copper
Earlier in the article, we mentioned the wide use of copper as the reason why the price of the metal is perceived as a good indicator of strength and direction in the economy. The usage refers to the demand side, but it is the balance between this and the supply side that determines the price development. Like aluminum, copper can be recycled and used many times. Numbers from the International Copper Organization (ICA) state that approx. 35% of consumption in 2020 came from recycled copper, and the rest from the world's copper mines. Among the producers, the Chilean state-owned company Codelco was narrowly the largest in 2020, ahead of the broad global mining company BHP. In the next places, the mining conglomerates Freeport-McMoRan and Glencore follow, ahead of the more pure-play Southern Copper. The Nordic region is also present on the manufacturer list with Swedish Boliden as a considerable player.
Developments in the copper price will be an important factor for the daily price fluctuations in these companies, but perhaps to a lesser short-term extent than the oil price is for the oil companies and the aluminum price is for the aluminum companies. This is simply because most mining companies are less of a pure-play and are thus affected by several factors. In a mine it is rare to find only one type of metal, and Boliden, for example, produces both zinc, copper, lead, nickel, silver, and gold from its mines.
If you want to trade copper, it is easiest to trade securities based on the metal itself instead of going around the producers. Copper has a well-developed international futures market, and players such as Vontobel offer a range of trading products that provide exposure to copper prices.
Disclaimer: After more than 20 years in the brokerage industry I started my own business in 2021. I published the book "Paleo Trading: How to trade like a Hunter-Gatherer” and launched Paleo Capital that manages a hedge fund according to the principles described in the book. I emphasize that nothing written on this blog is to be regarded as personal advice or a concrete call to take positions. Everyone must be responsible for their own decisions and familiarize themselves with the products they use.
Risici
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