The copper alarm bells are ringing. Copper for March delivery plunged more than 5% today, hitting its lowest closing price since 2009.
With the recent crash in oil prices, the copper drop has many worried that the so-called “recovery” is over. Copper has long been called a “barometer” of how well the economy is doing. Some have even jokingly referred to it as “Dr. Copper” for its ability to predict market changes.
Well, the metal is now down 11.3% so far for 2015. When you look at the recent moves in conjunction with what has been happening with oil prices, it looks like there is serious trouble on the horizon.
The key thing to understand about how important copper is for the economy is its use as an industrial metal. New construction projects mean new copper orders. If copper demand is dropping, that means that new construction projects are also.
You probably heard about the construction boom that has been happening in China. The country has been in an historic real estate and construction bubble, building entire “ghost cities” with no one to occupy them.
Construction projects in China typically take 18 to 24 months to complete. Toward the end of those projects (when they are installing the wiring and plumbing) is when they need the most copper. If we are already seeing a +10% drop in copper prices this year, that means that the construction boom (bubble) for China is over.
What is worse is that China has been using complex commodity financing deals to bring in low-cost US dollar funding, some of which has been used to fund Chinese property development. The purpose of these financing deals was to lock in a low price for copper. The problem is that those deals were made based on the demand of the Chinese property bubble and that the prices were already inflated.
Those financing deals were predicated on copper futures and derivatives to hold at or above the then current pricing. With each drop in the price of copper, those futures and derivatives contracts lose more and more money.
Copper prices falling means that the Chinese economy is slowing. We already know what has been happening as a result of the decline in oil prices: job losses and declining derivatives contracts. With Japan already in recession, Russia in the midst of a currency crisis, and Greece exiting the Euro, a slowdown of China’s economy means that the entire planet could be heading for an economic disaster.
Ira Epstein, a broker at the Linn Group, a commodities-trading firm in Chicago, told the Wall Street Journal: “The dumping of copper is saying that the world economy is not on a stable footing. This is the sign of a global issue.”
The Dow closed down more than 180 points today and gold hit its highest level since Oct. 22nd.