Can Copper withstand an Ailing US Economy?

By Leia Michele Toovey- Exclusive to Copper Investing News

To date, 2011 has proven to be a wild-ride for copper prices. The red metal reached record highs in February, extending on gains in 2010. Since the record break, copper has  faced some headwinds. For instance, macroeconomic data from the US has suggested that the second largest copper consumer’s recovery is stalling, and on the other side of the scale- monetary tightening attempts at top consumer China are taking affect, stoking fears that as China cools its economy, its demand for commodities will drop.

Copper’s ascent after the recession started off on the back of China’s aggressive metal stockpiling purchases. China’s purchases eroded stockpiles of copper that built up during the recession, and nudged copper forward, toward a recovery, despite an anemic recovery in the United States.  As China’s purchases gained steam, the focus of the market turned to a supply deficit, adding extra impetus to the upswing. With declining supplies from aging mines, and growing demand, copper is projected to be in a supply deficit over the coming years.  This deficit is part of the reason that copper was able withstand the commodities sell-off that followed the earthquake in Japan. In fact, the earthquake in Japan was expected to offer a further tightening in the supply chain, as Japan’s reconstruction efforts will boost the country’s copper requirements.

This does not mean that since record prices were breached that it has been smooth sailing for copper.  The red metal was battered by the massive commodities sell-offs in the spring of 2011, with prices dropping from their February record. Prices are still off their February high, with a few factors contributing to the retreat, including accumulating data suggesting a stalling US recovery, evidence that China’s monetary tightening was taking affect, and growing concerns over the financial stability in the Eurozone.

The biggest concerns seem to be over the United States’ economy.  Shock-waves first hit the largest economy in the world back in April when Standard & Poor’s revised its credit outlook on the United States to negative from stable, citing a “material risk” that policymakers may not reach agreement on a plan to trim the country’s large budget deficit.

Beyond the deficit, there has been a consistent stream of data out of the United States suggesting that the economic recovery is losing momentum. Poor jobs data, sluggish manufacturing, declining housing starts and lackluster consumer spending, have painted a gloomy picture over the country’s economic prospects. This past Tuesday, in a speech, Fed Chairman Ben Bernanke said that the U.S. economy wasn’t growing as fast as had been expected this year.  Unlike previous lack-luster reports, this Fed statement was not backed with the suggestion of a stimulus. Investors had hoped the Fed chairman might indicate that the speech would indicate steps such as extending the Fed’s $600 billion bond-buying program, to help nudge the recovery.

Looking forward, if the US continues to struggle, will this mean the end of copper’s bull-run? For a little insight it helps to look at copper consumption and industrial growth data out of the top four consumers over the past two years. According to the ICSG bulletin, in 2009, China’s refined copper demand grew by 18.9 percent; the European Union’s dropped 14.3 percent, the United States dipped by 5 percent. In 2010, China’s demand decreased by 3.0 percent, the US grew by 5.9 percent and the EU by 6.3 percent. Japan’s refined copper demand dipped 28.2 percent in 2009, and climbed 18.9 percent  in 2010. These figures are important to consider, as you can see how demand oscillated over a two-year period where prices recovered.

It is hard to predict what the US economy’s impact on prices will be, due to the global nature of the copper market. Copper operates in an global market, with prices subject to influence from many countries. Factors that can influence prices include economic and political instability, international trade disputes, abrupt changes in regulatory requirements and currency exchange rate fluctuations. If the recovery from the last recession taught us anything about the copper market, it is that, it can stage a recovery with or without the United States, as long as there is someone else to pick up the slack.

According to the Research Report “Copper: A Global Strategic Business Report” Worldwide demand for copper is expected to hit 24.82 million metric tonnes by 2015, with most of the growth coming from increasing demand from  the developing economies of Asia. Demand for refined copper in China has been increasing due to rapid development in end-use sectors such as telecommunications, power, equipment manufacturing, automobiles, construction and consumer goods. According the World Copper Report, demand for copper from the Asian market including China, India, Korea, Taiwan and Indonesia among others is likely to race ahead at a rapid compounded annual rate for 2007-2015.

While demand is projected to grow, there will be a lag-time for some much needed new copper mines to come online and relieve the aging mines that the global economy is currently relying on. In the near-term, the supply deficit for copper will continue, and even if the US economies growth disappoints, copper market analysts believe that demand growth in the Asian and emerging economies will be more than able to pick up the slack.