Since the beginning of this year, the price of copper has risen by over 20 percent. So, Dr. Copper is telling us loud and clear that a recession isn’t coming. Right?
For decades, Dr. Copper has been seen as a reliable predictor of the economy. After all, copper is used in just about everything. Well-known examples include houses and other construction projects, electric vehicles, and a wide range of electronics. But copper is also essential in spacecraft engines, desalination plants, whiskey distilleries, and musical instruments. So, this cyclical metal should surely tell us something about upcoming economic trends.
Historical data backs up the notion that copper can be used as an economic barometer. Numerous studies indicate that, with a bit of flexibility in the analysis, there is a positive correlation between copper prices and the (future) development of GDP.
Keeping this research in mind, the strong price increase should make us cautious about predicting a near-term recession.
Distorted relationship
If only it were that simple. Over the years, the relationship between economic growth and copper prices has become blurred—especially with “our” friend across the Atlantic, where it has been significantly disrupted.
President Trump’s Trade War 2.0 and the highly volatile policies regarding import tariffs now play a dominant role in determining the price of copper and other metals. Unlike oil, Americans still rely heavily on copper imports from abroad.
This prompted Trump to issue an executive order highlighting the crucial role of copper in national security and economic stability in the U.S. The order also directed the Department of Commerce to investigate the impact of copper imports on national security. That investigation could ultimately lead to new import tariffs. This “copper” sword of Damocles is distorting the market, making it harder for traditional supply-and-demand factors to be fully reflected in prices.
Speculation
For speculators, this executive order is a golden opportunity. If new tariffs are introduced, foreign copper will become more expensive in the U.S. But it also creates arbitrage opportunities. Traders and speculators take advantage of price differences between the London Metal Exchange (LME) and the U.S. Comex market by moving copper into the U.S.
According to analysts, including those at Vontobel, this has already widened the price gap between these markets—from 240 dollars per ton when Trump took office to about 700 dollars per ton today. That’s roughly a 5 percent increase, meaning that part—but certainly not all—of the copper price surge can be attributed to Trump rather than the economy.
The role of China
Typically, China is the country to watch when it comes to copper prices—not only because of its massive real estate market but also due to its growing electric vehicle industry.
Bloomberg recently published an article titled “Cheap Chinese Cars Are Taking Over Roads Around the World.” While the EV sector is booming, the Chinese real estate market is struggling. In the past 43 months, home prices have fallen in no fewer than 40 of them.
Chinese consumers remain deeply pessimistic, which doesn’t exactly lead to exuberant spending. Nevertheless, I don’t think we should completely disregard copper’s predictive power. Alongside a range of other macro indicators, I still believe the likelihood of a U.S. recession isn’t all that high.
Moreover, as I wrote last week, it wouldn’t be such a bad thing for Trump if the economy cooled down a bit right now. After all, it gives him and his colleagues a perfect excuse to point the finger at Biden.
Jeroen Blokland analyzes striking and timely charts related to financial markets and macroeconomics in his newsletter The Market Routine. He is also the manager of the Blokland Smart Multi-Asset Fund, a fund that invests in stocks, gold, and bitcoin.