Copper offers peek into the world's economic future

Myra Saefong's Commodities Corner Oct. 17, 2008

(MarketWatch) -- In all of gold's fancy footwork, copper's been much ignored, but the metal may offer a hint that there's hope for the global economy yet.
Copper futures reached a record intraday level of $4.27 on May 5 2008 on the Comex division of the New York Mercantile Exchange. Then, as the financial crisis deepened and concerns over the global economy worsened, copper prices lost half their value.
Of the base metals, "copper is the interesting one -- it stayed high longer than the other base metals, but seems to have cracked now," said Brent Cook, independent exploration analyst. "Copper has lost its PhD and is now running with the frat boys."
Still, the metal might be a handy tool for forecasters trying to pry open their latest economic predictions.
'Copper has lost its PhD and is now running with the frat boys.'
— Brent Cook, independent exploration analyst

"Copper is usually a good gauge of economic health because it is broadly used, but more specifically because it is important to construction and equipment manufacturing that tend to precede other areas of economic activity, and that makes copper a leading indicator," said David Coffin, co-editor of HardRockAnalyst.com.
He believes that copper prices are "testing bottoms." Copper futures prices fell as low as $2.06 on Thursday.
Even if copper prices have reached a bottom, that "does not mean a quick recovery to that mystical $4 level right away," said Coffin.
"The red metal took a steep dive after having held up fairly well due to the thin margin in its supply system," he said. "It had been one of the few metals to hold well above its cost of production through most of this debt drama aided, we think, by its relatively limited Chinese output where local and world prices for some other metals have diverged sharply this century."
And "it is still the metal to watch for trend as the world finds out whether it is indeed time to replenish China's stockpiles," Coffin said.
Emerging support
Indeed, there was a time not long ago when metals demand from China took over the headlines. Actually, that factor still holds true and will likely be copper's support as volatile trading in the commodities sector continues, analysts said.
"The present copper price factors in a severe downturn worldwide, stemming from a slowdown in the U.S.," said Lawrence Roulston, editor of Resource Opportunities. "In reality, other parts of the world are still growing strongly and will continue to grow in spite of a slowdown in the U.S. economy."
He points out that emerging economies, as a whole, are seeing growth, and "have a greater intensity of use of metals than the mature economies."
China, the world's most populous nation, is the world largest consumer of metals, and is expected to continue to grow at more than 10%, Roulston said. At the same time, growth there is driven largely by infrastructure development.
Look at it this way: the copper market has seen slowing import demand from China and translating that as a fall in demand, said Martin Hayes, an analyst at BaseMetals.com. But that has been more likely due to "destocking ahead of the summer and because of the Olympic-induced industrial slowdown," he said.
"As such, we feel this may have left the physical market in China short, and may lead to a pickup in imports that might support prices for a while during [the fourth quarter of 2008]," he said. China could build up strategic reserves of copper, said William Adams, an analyst at BaseMetals.com. "They have massive foreign reserves, they may well want to diversify some of their dollar reserves and they are resource hungry," he said. "They may well decide to buy copper now that it has fallen so much."