As copper surges, Wall St. wonders: What's the message?
Lowly copper has a reputation for heralding economic turning points. So with the metal’s price up 57% this year, to a six-month high on Wednesday, some stock market bulls see copper as underpinning the case that the economy is bottoming.
But copper’s ascent could just be the result of some old-fashioned hoarding by China -- the one major government with loads of money to spend on something other than a banking-system rescue.
Near-term copper futures in New York rose to $2.20 a pound Wednesday, up from $2.11 on Tuesday and the highest since mid-October. The price has surged from $1.41 a pound at the end of 2008.
By contrast, raw materials prices overall, as measured by the Reuters/Jefferies CRB index of 19 commodities, are down slightly this year.
"What’s happening in copper now is a reflection of the broader global economic story," Michael Cuggino, chief executive of Pacific Heights Asset Management, told Bloomberg News. "We’re still expecting to see long-term global growth that’s going to drive demand for copper and the other commodities."
But is the price of copper really a good early-warning signal for the rest of the economy? The historical evidence isn’t very convincing, as Guy Lerner points out on this post at the MarketOracle website.
And this time around, stockpiling by China -- rather than fundamental demand for the metal from a broad range of industrial users -- may be skewing the price.
From a Financial Times of London report on March 22:
SRB’s decisions are shrouded in secrecy, making it virtually impossible to assess accurately how much the Chinese government has bought. Traders estimate that the SRB is in the process of securing 300,000 tons and speculate that it could buy up to 1.2 million tons this year. Global copper production last year stood at 18 million tons.
"Real demand has played little part in the current copper price rally and remains notably weak as global manufacturing activity continues to decline," David Wilson, metals analyst at Societe Generale, told the Times.
Of course, copper traders may not care what’s fueling the metal’s bull move. But stock traders may want to be careful about drawing conclusions about the economy based on copper’s current hot streak.
-- Tom Petruno
Photo: Uploading copper ore at the Prominent Hill mine in Australia. Credit: Coober Pedy News / AFP Getty Images