The global copper market is behaving in a way it hasn’t in three decades. Anomalies in the copper market have raised eyebrows, with some speculating it as an early indication of potential economic turbulence.
What's Happening with Copper?
A surprising development has been observed in the copper market with the spread between the spot price and the futures price for copper reaching its widest margin since 1994. In commodities trading, when the futures prices exceed spot prices, it's termed as “contango”. This state of extreme contango in copper is driven by a significant drop in spot prices, accompanied by an accumulation of inventories in London Metals Exchange (LME) warehouses globally.
Why are Copper Prices Declining?
Analysts pinpoint China's economic frailty as a primary cause for the plummeting demand for copper. China, being the world's second-largest economy, has a significant impact on global markets. Any fluctuations in its economic activities can ripple across continents, affecting Europe, the US, and other regions.
Recent LME data reinforces this concern. A surge in stored copper — 163,900 tonnes as of September 22 — represents a staggering 50% rise from the beginning of the month. In fact, this trend has been evident since mid-July.
Ewa Manthey, a commodity strategist at ING, said, "This shows clear signals of weakening demand". However, she also emphasized that the current inventories are low when viewed from a historical perspective.
Global trade activity offers further insight. A sharp 3.2% decline in year-over-year trade in August, the steepest since the tumultuous year of 2020, suggests overall economic slowdowns.
For decades, copper has been viewed as an economic bellwether, aptly named “Dr. Copper” for its predictive prowess. The metal's versatility — its application ranges from industrial and medical sectors to basic utilities in homes — makes it an invaluable economic indicator.
However, some experts have started questioning copper’s prescient abilities. Bank of America’s research note highlights a diminishing sensitivity of copper demand to global GDP growth. It noted that despite an industrial recession, copper prices have shown resilience, indicating a possible decoupling of copper's prices from broad economic indicators.
The Global Perspective
While the LME showcases a clear inventory buildup, it's essential to take a broader view. The aggregate of exchange stocks, including the CME, the Shanghai Futures Exchange, and the International Energy Exchange, remains historically low, despite a noticeable rise since the beginning of the year.
Although China’s lean inventory indicates a potential spike in imports if its manufacturing gears up, the substantial LME buildup suggests a counteracting force — the weakening demand and surplus metal elsewhere in the world.
The perplexing behavior of the copper market, though not a conclusive predictor, is a significant development that economists, policymakers, and investors should closely monitor. If history serves as a guide, such market anomalies often precede broader economic shifts. Whether copper continues to uphold its title as “Dr. Copper” remains to be seen, but for now, its movements demand attention.