Reduced Copper Prices Shows Another Signal to a Coming Recession

Reduced Copper Prices Shows Another Signal to a Coming Recession
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Some investor’s view copper prices as a leading indicator of the world economy. If you are one of them, you have reason to be concerned.

What’s going on: On Thursday, copper prices fell to a 16-month low as traders unloaded the commodity. They’ve decreased by more than 11% in two weeks.

“Copper prices are just now beginning to reflect the reality that global growth is slowing,” said Daniel Ghali, director of commodities strategy at TD Securities.

The metal is found in a variety of building elements, including electrical cables and water pipes. As a result, it’s frequently used as a proxy for economic activity, as demand tends to rise as the economy expands and fall when it contracts. Because of its supposed ability to predict the future, traders lovingly refer to it as “Dr. Copper.”

After Russia invaded Ukraine earlier this year, the price of copper and other important metals skyrocketed. (Before the Bell readers will recall that the London Metal Exchange momentarily halted nickel trade in March due to the chaos.)

According to S&P World, Russia contributes for 4% of global copper output and nearly 7% of global nickel output. Traders were concerned that supply would run out just as the economic recovery from the epidemic began, so they began stockpiling aggressively.

Prices are now moving in the other way as recession worries take root.

“When that hoarding drive subsided, global commodity demand began to link with global growth,” Ghali explained.

Here’s something new: The first look at a carefully watched economic indicator for June confirmed that economic activity is slowing as rising food and gasoline prices pinch.

According to the S&P Global Purchasing Managers’ Index, which was issued on Thursday, private sector output in the United States slowed “sharply” this month.

“After enjoying a mini-boom from consumers returning after pandemic restrictions were relaxed, many services firms are now seeing households increasingly struggle with rising costs of living, with producers of non-essential goods seeing a similar drop in orders,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

Businesses are also becoming increasingly concerned about the prospects as the Federal Reserve rapidly raises interest rates in an attempt to keep price rises in check.

“Business confidence has now reached a level that would generally precede an economic downturn, increasing the danger of recession,” Williamson added.

According to the PMI estimate for the 19 eurozone nations, growth in June fell to a 16-month low.

And China, which has been a critical driver of global economy, is still dealing with the consequences from Covid lockdowns and a real estate downturn. The country’s economy improved somewhat in May, although retail sales fell for the third month in a row.

What comes next: Growth in China is projected to speed up later this year, and copper and other base metals prices could return at that time, according to Darwei Kung, portfolio manager for commodities at DWS. It’s simply a matter of time until it happens.

“They’re coming back; it’s just a matter of when,” Kung said.

Meanwhile, as economic concern remains, prices may fall more.

“Over the medium run, copper prices definitely have further room to decline, particularly as we approach a recession,” Ghali added.

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