All you need to know about... Doctor Copper

The orange metal — copper — has been in the limelight for all the wrong reasons lately following the Sterlite protests. As Sterlite was one of the major producers of copper, there has been much debate about how this closure will alter supply dynamics for the metal in the domestic market. But did you know that copper occupies a special place among industrial inputs? So much so that economists trying to gauge the direction of the world economy respectfully call it Doctor Copper.

What is it?

Copper is a base metal that has versatile applications across utilities, heavy industry, transport and communication. Therefore, the price of copper, which is determined by demand-supply dynamics for the metal, is considered to be an excellent indicator to the health of the global economy. Economists use the term Doctor Copper when using signals from copper prices to gauge the state of the economy.

The International Copper Study Group estimates the key user industries for copper to be equipment (31 per cent), construction (29 per cent), industry (11 percent), transport (13 per cent) and infrastructure (16 per cent). This wide range of applications makes copper prices a bellwether indicator of the twists and turns of the economic cycle.

There’s another link between copper and global economic prospects too. As China, one of the fastest growing economies, consumes almost 50 per cent of the world’s copper ore each year, copper prices show a strong correlation with the Chinese economic growth. For instance, Chinese GDP growth decelerated from around 10 per cent in 2011 to 6.7 per cent by 2016. During this period, the copper prices plummeted from nearly $10,000 per tonne in 2011 to a multi-year low of $4,300 per tonne, in the beginning of 2016.

When China started recovering along with the world economy in 2017, copper prices rebounded by about 30 per cent to $7,200 per tonne in the one year to end-2017. Its prices are now around $6,800 per tonne.

Why is it important?

Past events demonstrate that copper prices are a harbinger of economic growth. Analysts believe that the meltdown in LME (London Metal Exchange) copper prices before 2008 was an early warning of the global financial crisis that unfolded that year. That should lead us to closely track Dr Copper to gauge where the world is headed now. Currently, LME copper prices are consolidating after their big move in 2017. But with usage of this metal expected to grow at 3 and 2.2 per cent in 2018 and 2019, respectively (as per International Copper Study Group), the trend is expected to be northwards indicating modest economic growth.

The relationship between Indian stock markets and benchmark copper prices cannot be disregarded either. The correlation between MCX Copper prices and the NSE 500 index for the period between 2015 and 2018 is a high 0.85 (a correlation of one indicates perfect correlation). This suggests that stock markets often move in tandem with domestic copper prices. That could be an indicator of a buoyant commodity cycle feeding into positive stock market sentiment.

Why should I care?

If you track the global economy closely, or are an active investor, you cannot ignore what Doctor Copper says. But having said that, don’t make big bets based on Dr Copper alone. Commodity prices are determined by multiple factors and not all are based on demand alone. For instance, lower production due to restricted mining or smelting can reduce copper supply and push up its prices despite subdued economic growth. Conversely, any supply glut could lower copper prices in spite of good demand. In India, the shutdown of Sterlite, which produces about 45 per cent of the country’s copper, changes the demand-supply dynamics and may send Dr Copper soaring. But this cannot be read as a bullish signal for the economy.

The bottomline

Heed Dr Copper, but don’t go overboard.

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