Dr Copper predicts trouble for China

published 2 November 2012

If you want to know the outlook for an economy, don't ask an economist the price of copper has a much better track record. Because the metal is used in so many areas of the economy, its price is seen as a good activity bellwether. It is known as Dr Copper' due to its ability to outsmart PhD economists.

On Monday, the price of copper fell to seven-week lows of around $7,700 per tonne as stocks unexpectedly increased. Bears point to a slowing Chinese economy as one reason for this.

During the last decade, China bought as much of the world's copper as it could get its hands on, helping push the price from just under $2,000 per tonne to a peak of around $10,000. Are rising warehouse stocks of the metal and a lower price telling us a nasty recession is around the corner?

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China's construction and infrastructure boom is certainly coming to an end and recent GDP growth has been weak by Chinese standards, slipping recently below Beijing's precious 8% barrier.

Ultimately, prices for most assets are determined by supply and demand. Increased production by copper miners could be a reason for lower prices. Many mining companies say they foresee a balanced market. But that seems optimistic in the face of waning Chinese demand.

It's worth remembering that this market can move very quickly. Copper prices halved in a matter of months during the financial crisis in 2008 to less than $4,000 per tonne. Dr Copper's latest wobbles should make China bulls especially nervous right now.