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Oil prices are not considered by many analysts as a gauge of economic activity on account of cartels which have at times overruled forces of supply a demand. Copper is given a higher weightage to oil to gauge economic activity globally.
A sharp drop in copper prices, the most in last six years touching the lowest mark since August 2009, portrays the bleak environment globally. Commodities are trading at the lowest level in more than 12 years, thanks mainly to the drop in energy prices. Copper is the worst performing non-energy raw material on the Bloomberg Commodity Index, which fell to the lowest since August 2002.
Following are five reasons for the fall in copper prices.
Lower growth forecast: World Bank in a recent report lowered global growth rate to 3 per cent for 2015 lowering its earlier estimate of 3.4 per cent it made in June. Commenting on the lower projection, World Bank economist Kaushik Basu said that global economy is at a disconcerting juncture and it is as challenging a moment as it gets for economic forecasting.
China worry: China is a big cause of concern simply because of its sheer size. A Bloomberg report quoting from a CRU group report says that demand growth in China will slow to 4 percent in 2015 from 5.5 percent last year. Between 2002 and 2012 it averaged more than 10 percent. The country’s economy is forecast to grow 7 percent this year, the slowest pace since 1990. World Bank in its report also pointed out that China is slowing and the second biggest economy is undergoing a ‘managed slowing.’ Deutsche Bank AG says that the world’s biggest user will grow at the slowest pace since at least 2010. Goldman Sachs in fact pointed out that any rebound in copper will depend on government stockpiling by China and pace of demand growth in that country.
Oil Prices: Goldman Sachs Group Inc. in a report said that lower energy costs and demand weakness amid worse-than-expected economic data in China are driving prices down. Lower oil prices results in lower cost of production of copper, since energy and transportation cost accounts for 25 per cent of the cost of production. Morgan Stanley said in a report that fall in oil prices is sending the signal that it will encourage mining companies to increase production.
Inventory issues: Rising copper inventories globally and specifically in China is adding to the fall in copper prices. Copper inventories have climbed 4.5 percent since the start of the year and are up 29 percent since June, when they dropped to the lowest in more than five years, in the main exchanges of London, New York or Shanghai according to data compiled by Bloomberg. Goldman Sachs says that China’s consumption is likely to remain weak with visible inventories rising in the first half of the year.
Stronger Dollar: Since copper is priced in dollar in major exchanges a stronger dollar means that it becomes expensive to a foreign buyer when the dollar rises. Dollar index which is measured against a basket of 16 currencies is trading at over 11 year high. Goldman Sachs pointed out a stronger dollar as one of the reason for copper not being favored by investors.
