Financial Professionals

Market Insights

A A A

Copper Surges

07/08/2011
Copper prices often are an excellent indicator of global economic conditions. Professional traders refer to the metal as "Dr. Copper" for that reason. While copper prices do not necessarily forecast a particular global growth rate, they do accurately forecast how deep any global growth contraction might be.
 
As Figure 1.1 below shows, spot copper prices declined from mid-February into May. Much of the decline was predicated on declining demand from Asia, in particular China. A process in China known as de-stocking was evident during the first quarter, decreasing demand for copper and raising global inventories (Figure 1.2).
 
As global economists pontificate on the depth of a global growth slowdown, a dramatic recovery in copper prices suggests the growth scare will be shallow at best. Renewed demand from China for the red metal is evident. Copper stockpiles in Shanghai fell 591 tons, to 89,498 tons yesterday. I view that demand as structural, as its use is relevant to produce air conditioners, refrigerators, and infrastructure for electricity.
 
The demand story goes beyond China. In fact, coming into 2011, I expected a global copper market that would potentially face a supply shortage, somewhere around 300,000 to 400,000 tons.  Recent weather disruptions in Chile has limited production at the world's largest copper mine in Antofagasta, where BHP's Escondida mine is located. The risk now is that the potential 2011 supply deficit widens further.
 
Investors should not dismiss the dramatic rise in copper prices from $404.10 on June 23 to the current $443.00.  It is concrete evidence that the pause is refreshing.  For the second half of 2011, copper prices will be an excellent indicator of whether risk is truly back on again.
 
Figure 1.1  Spot Copper Price, January 1, 2011 to July 8, 2011

Source:  Bloomberg
 
Figure 1.2  LME Copper Inventories, January 2011  - May 2011

Source:  Bloomberg

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.