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Falling Copper Prices Are More Dangerous Than You Think

The crash in the energy sector has grabbed a lot of airwaves, while the long-term down-slide of copper prices did not make much news. Recently, copper plunged below the long-term support of $3 a pound, and the downside target is still a lot deeper. Technically, copper prices are expected to stabilize near $1.5-2 a pound; the last time it touched those levels in 2008, the global economy collapsed. There is an apt expression: “the economy is topped with a copper roof”.

Image: http://www.nasdaq.com/markets/copper.aspx?timeframe=10y

Copper has always been a good barometer of economic activity as it gets used in construction activities, electricity, transportation and other infrastructure. The pummeling of the commodities such as crude oil, natural gas, and copper is also a sign that the global economy could be slowing faster than earlier perceived. Also, it stokes the fears that the slowdown may engulf other commodities too. The World Bank in its latest forecast has cut the global growth rate to 3% for 2015, down from its previous calculation of 3.4%.

Three primary reasons for the fall:

  1. Slowdown in China: The world’s largest consumer of copper, China, is facing a massive slowdown in its real estate and manufacturing sectors. China alone consumes 40% of the global copper supply and any slowdown in the nation leads to oversupply everywhere else.
  2. Ultra-low interest rates: The prevalence of ultra-low interest rates in the US and Europe even half a decade after the last financial meltdown shows that the developed economies are in no way ‘growing’. The inability of the Central Bank managers to stoke inflation also adds to the growth worries.
  3. No real growth elsewhere: Japan and India continue to show no signs of a significant uptick in economic activities. Russia is now on the verge of a severe recession.

The copper down-slope represents the inherent weakness of the world economy and could be a sign of an impending financial collapse.

Written by: Nikhil Gupta (Financial Markets Analyst/Writer)
Twitter: @nikhil9154

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