What’s Going on With Copper?
Over the past couple of weeks, the price of copper has broken down to multi-year lows. Last week, I argued that this breakdown was likely a result of economic weakness. Given copper’s ubiquitous appearance in industrial and consumer goods found across the world a fall in the copper price is often a signal that the demand for these products is weak. This means that the global economy more generally is weak as well, by extension.
However, since then another explanation has come up that needs to be addressed. It turns out that copper is used to collateralize Chinese loans, and if several of these loans are called in by creditors at the same time, then we could see forced selling in the copper market. This explanation is certainly plausible, especially given the troubles we have seen coming out of China’s banking system, which is massively overleveraged.
Nevertheless, I wouldn’t immediately throw away the “weak economy” explanation, and I say this for the following reasons. First, recall that in the article I wrote last week, I maintained that weakness in the copper price is just one sign among many that we are seeing economic weakness. While one could argue that the fall in copper prices is the result of an aberrant market occurrence such as forced selling by Chinese debtors, we cannot blame other weak market signals such as weak retail sales on this.
Second, if the economy were strong and the sell-off in copper was due to forced selling by Chinese debtors, then we would have seen a sharp rebound given the strong demand for copper resulting from strong demand for industrial and consumer goods. We can still see this as the sell-off is still young. But so far we haven’t.