Is it time to retire “Dr Copper”?
It has been a while since we made an update on the copper market. Apart from its industrial applications, it is often considered to function as a temperature gauge, telling us where the market is and where it is heading. Hence, when the market swings between hope and despair, it becomes increasingly challenging to know what to believe. Perhaps copper can give us a hand.
A Good Start to the Year
Copper has started the year on a good note. Rising prices tend to show a positive sign for the general market, as they indicate demand from core industries and thus increasing economic activity. In the past, its track record has been debated; however, a decrease in copper demand usually occurs before a global economic slowdown. But should we interpret today’s market as positive considering the surge in its price? Well, it is not quite that simple. Lately, the main drivers of copper prices have been arbitraging opportunities rather than a bullish view on the market.
Arbitrage Drives the Price Trend
In this context, arbitrage refers to traders taking advantage of price differences between markets when trading the same asset. Specifically, copper is moving from the London Metal Exchange (LME) warehouses to COMEX vaults in the US, causing the spread between the two markets to widen. For reference, from when President Trump entered the Oval Office to today the spread has increased from 240 USD per ton to around 700 USD per ton. This suggest that investors are trying to pre-load their copper in the US to avoid higher import costs if tariffs are implemented.
As mentioned in the beginning, copper is sometimes referred to as “Dr. Copper” because of its role as an economic indicator; rising prices usually indicate booming industrial activity and vice versa. This time, however, the rally is less about strong underlying demand and more about technical aspects. Funds and traders are buying U.S-priced copper futures and options as a hedge against tariffs rather than betting on an economic rebound. Nevertheless, copper has been increased demand from Chinese buyers, who after returning from Lunar New Year further have supported the demand.
Short and Long Term
Furthermore, short-term volatility can be expected as traders are reacting to new trade policy news. The current arbitrage spread shows that the U.S. market is preparing for higher import costs. If tariffs are confirmed and perhaps similar to the 25% seen on steel and aluminum, there could be a potential premium for US copper thus driving prices up in the short-term before supply routes adjust.
However, for the long-term copper’s performance is largely tied to its industrial uses, such as construction, electronics, and renewable energy. Therefore, while the short-term effects of the tariffs may be profound, sustained economic weakness or strength will most likely dictate the direction of copper in the long term. Still, if the trade war run by presidents Trump persists it can affect global supply chains, which in the long-term could decrease the economic growth and therefore impact copper prices.
Is Dr. Copper still a relevant indicator?
Ultimately, to return to where we started, is Dr. Copper a good indicator of economic activity? In the short term, copper is not the best indicator of economic activity, as we are experiencing a situation of “tariff panic” rather than one driven by healthy underlying demand. The massive spread between the LME and COMEX is less a sign of an economic boom and more a signal that traders are scrambling to protect themselves from policy uncertainty. It is therefore a delicate balance between technical arbitrage and fundamental drivers, that is likely to make for a volatile market in the short term, providing opportunities for both short and long positions. However, retiring “Dr. Copper” may be too drastic; perhaps putting it on leave would be a more justified measure until the markets return to “normal”.
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