Dr Copper’s mixed signals suggest the global economy is at a delicate moment

As the rebound in iron ore prices to well above $ 200 per tonne (to around $ 214 per tonne this week) has shown, efforts by the Chinese authorities have so far been unsuccessful.

This is likely because the demand for metals has increased globally as unprecedented fiscal stimuli and rising consumer demand have resulted in rather dramatic economic rebounds.

The Fed’s claim that the highest US inflation numbers in decades are a passing phenomenon seems to have been accepted by the financial markets.Recognition:NYSE

The speed and strength of the upswing has resulted in companies – both producers and their customers – running out of inventory, exacerbating supply chain problems and increasing pressure on raw material prices.

The recent volatility in the price could also have something to do with the uncertainty surrounding monetary policy, particularly the US Federal Reserve.

Copper is strongly correlated with economics and inflation (as the “financialization” of commodities has developed over the past few decades, it has been seen as good financial protection against inflation) and therefore the consequence of rising inflation figures in the US and elsewhere may have been a factor in price rise.

In recent weeks, however, the Fed’s claim that the highest US inflation figure in decades was a passing phenomenon seems to have been accepted by financial markets, with bond yields falling significantly.

If the global economy is to be significantly decarbonised, the demand for copper, the most widely and intensively used metal in “green” technologies, will increase.

The easing of concerns that the increased inflation data could force the Fed to cut its bond and mortgage purchases and hike US rates earlier than expected is likely an explanation for the loss of momentum in copper prices, although that could change overnight if the Fed signaled concerns that the increased inflation rates might not be short-lived.

Underpinning the copper price and offering some certainty that it will not fall back to pre-pandemic levels, is the increasing global commitment to lowering CO2 emissions.

If the global economy is to be significantly decarbonised, the demand for copper, the most widely and intensively used metal in “green” technologies, will increase.

Ivan Glasenberg, retired CEO of Glencore, said last month that the price would have to be at least $ 15,000 per ton to encourage new production if the mining industry were to produce the additional million tons of metal needed to run that merging developed world consensus to underpin net zero carbon emissions by 2050.

Glencore's retired CEO Ivan Glasenberg says the price of copper would need to be at least $ 15,000 per ton to incentivize new production to meet demand.

Glencore’s retired CEO Ivan Glasenberg says the price of copper would need to be at least $ 15,000 per ton to incentivize new production to meet demand.Recognition:Bloomberg

The lack of investment by existing copper producers since the end of the last metals super cycle a decade ago; declining production and trade in most of the existing large mines; reduced exploration and few new discoveries of real size and the likelihood that new large deposits that are discovered are located in difficult and quite risky jurisdictions (political and geographic) act as restrictions on new supply.

Copper scrap and lower conductivity substitutes like aluminum can play a role in meeting demand, and that demand could of course be hurt in the short to medium term if the global economic recovery turns out to be a bad morning.

However, the nature of the demand is changing and its base is expanding.

Where it was the commodity-intensive industrialization of China, and to a lesser extent other developing countries, that drove the final super cycle of metals, and China’s continued infrastructure-intensive growth that has kept demand flooring for the past decade, decarbonization is being driven by developed economies.

Demand for copper and other metals important to renewable technologies is growing rapidly in Europe and the United States, adding long-term additional demand to a market that is becoming increasingly scarce.

It may be that “Dr. Copper ”will not only be an indicator of global economic health in the longer term, but a good way to track progress in global decarbonization and climate health.

In the short term, however, the former will be most useful for gaining insight into the sustainability of the economic recovery in China, the US, and Europe, and especially for the US, as a real-time barometer of inflation and interest rate outlooks.

If the price stays high, it would indicate that the Fed has misjudged the resilience of a recovery that is going through in the US the unprecedented spending plans of the Biden government while it would pose a threat to as well China’s ability to keep inflationary pressures under control that threaten its competitiveness and growth.

Loading

If it wears off, it would suggest that the boost to global growth from pandemic-inspired incentives will be short-lived, that the acceleration of decarbonization will not meet the commitments of developed countries, and that the world will retreat to low growth , Inflationary and low interest rates environment of the decade before the pandemic broke out.

The Market Recap newsletter is a summary of the trading day. Get it every weekday afternoon.

Comments are closed.