Why Copper Has Lost Its Indicator Role

By Contributed Article | March 29, 2013

Why Copper Has Lost Its Indicator Role

Dr. Copper, as the industrial metal is known to investors, might be offering Wall Street the wrong economic prognosis, or maybe we’re just misreading it. After all, a physician’s handwriting is tough to read, and so is that of copper, whose “doctor” title refers to it as an indicator for economic trends and equity markets.

“Correlations have certainly broken down between equities and copper prices,” said Andrew Rosenberger, Brinker Capital senior portfolio manager. “Market participants used to look towards copper as an indicator of equity returns,” he said. “That may be true in a capital-expenditure driven economy like we had in 2005-2008, but this recovery, to date, has been devoid of meaningful capex.”

Data on the metal’s prices and US equities show a directional divergence, with stocks doing well while copper isn’t, and with the economy showing modest growth. Copper futures prices dropped more than 6% year-to-date as of Thursday, March 21. They gained 6.3% for 2012, but that was after a nearly 23% drop in 2011. Meanwhile, US equities have rallied, with the benchmark Dow Jones Industrial Average up over 10% so far this year, after gains of 7.3% last year and 5.5% in 2011.

For all of 2012, the US economy increased at a 2.2% pace, compared with 1.8% in 2011. The Federal Reserve this week said it expects the economy to grow at a moderate pace, and economists project growth in the first quarter to rise to 2.5% after barely growing in the fourth quarter.

But if you look closely, you might see a good reason why copper’s not an accurate indicator of economic conditions and equity markets right now.

U.S. Bank Wealth Management senior investment strategist Robert Haworth said copper is reflecting its underlying supply and demand fundamentals. “Its economic signal is slightly muted by excess supply currently,” he said. “We believe global economic growth should accelerate over the course of this year, taking up excess supplies and returning copper to its status as a signal of economic activity.”

Copper’s performance has been disappointing in light of some of the latest economic indicators, which point to improvements in the US and Chinese manufacturing sectors.

“There is overall optimism about the American economy steadily recovering, unless of course the costs of sequestration have a greater-than-expected impact,” said Ted Arnold, an independent, London-based consulting-minerals economist.

Overall, “copper has been a flop as of late, as the growth prospects have been dimmed,” mostly owing to the Chinese government moving to reign in its overheated housing market, said Phil Flynn, senior market analyst at Price Futures Group. “Sharply rising Chinese home prices are raising expectations of more government clamp-downs on the sector, thereby reducing the Chinese demand for copper,” he said.

And true to China’s usual veil of secrecy, the International Copper Study Group said that based on preliminary data, anecdotal evidence suggests unreported inventories held in bonded warehouses in China increased significantly during 2012, and Chinese industrial use of copper might have been significantly less than apparent use.

“Accounting for this inventory increase would significantly alter the calculated market balance,” the ICSG said. In other words, there could be a large surplus of Chinese copper supplies the market doesn’t know about.

That said, the good news is that China’s economy is still growing, albeit at a slower pace than in the past, and that’s been the driving force for commodities in general.

The original version of this article by Myra P. Saefong appeared in MarketWatch.

Copyright (C) 2013 LexisNexis, a division of Reed Elsevier Inc. All Rights Reserved.

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