Copper price as an economic indicator

by: Casper Burgering

Economy and copper price.pdf ()
Download
  • There is a strong correlation between copper prices and global economic activity
  • Cyclical, fundamental and external factors have a major impact on the copper price
  • To some extent, the price is an indicator of the world economy

Copper is a major component of the economy and plays a particularly important role in emerging countries. At a global level, China is a major player, accounting for a major share of both the consumption and production of copper.
Copper is a vital part of our daily lives. Given the wide variety of its applications, it is often suggested that the trends in the copper market are a useful leading indicator of the state of the world economy. And in fact, the metal is sometimes referred to as “Doctor Copper”. This report sets out the relationship between the copper price and a wide range of economic variables. Which economic or other indicators have a strong correlation with copper, and what are the key drivers? Can the copper price be considered an indicator of the world economy? Our analysis shows, among other things, that the copper price has a strong correlation with numerous indicators that are relevant for tracking the world economy. So there is some truth in the contention that the copper price can help identify macro-economic trends. When demand for copper grows, the price will rise. And greater demand for copper means that industrial activity is rising, and hence that the economy is expanding. Even so, the correlation remains challenging: the copper price also reacts strongly to the release of new macro data, as stakeholders try to estimate future demand for copper, and this sentiment is reflected in its price. In any case, it is more relevant to track the long-term price trend (in relation to the economy and the fundamentals) than the short-term movements.

Is the copper price a leading indicator?

At different points in time and with varying intensities, external factors, global economic developments and fundamental factors exert an influence on the copper price.copper price economy

Fundamentals (especially global demand for copper) continue to play a very important role in copper price formation. Based on trends in copper demand, conclusions can be drawn concerning the state of the world economy. After all, lower demand for copper points to lower industrial activity and hence to weakening global activity. However, the copper price also responds strongly to macro-economic figures, which may disrupt the correlation with fundamental factors and may somewhat affect price volatility. But this would have more of an impact on short-term trends in the copper price (which are also partly influenced by investor sentiment and external factors), whereas the long-term trends are driven more by fundamentals. Does this make the copper price a leading indicator? In our view, movements in the copper price can offer valuable insights into the state of the world economy. In this context, the correlations with world trade and the Chinese economy are of particular interest. But we would add a note of caution here, because the relationship between the copper price and these variables remains somewhat of a chicken-and-egg situation. In addition, the more intangible factors also have an impact on the copper price over time, because it is also affected by investor sentiment and other intangible factors (such as speculation, the use of copper as collateral, geopolitical issues). These aspects may well lead to significant fluctuations in the copper price even though there is no reason for such volatility on fundamental grounds.

For more detailed analysis, please download the full report.