Base Metals

A slowdown in China’s economy could spell bad news for Chile’s economy.

In early May, Dennis Gartman, editor of The Gartman Letter, told CNBC’s Fast Money that he believes “Dr. Copper is sick” — since then, the metal has not been able to shake that diagnosis. As the bellwether for the economy, copper hasn’t been performing well enough to spark confidence.

On Thursday, copper was down the most in three weeks, falling to $7,300 a tonne on the London Metal Exchange. Knocking 3 percent off the red metal’s price tag was China’s Purchasing Managers’ Index reading, which once again checked in below the 50 mark; the reading of 49.6, China’s lowest in seven months, signals that the country is in contraction mode.

“Reduced demand prospects for metals, coupled with abundant capacity and a government not inclined to ‘prime the pump,’ means that China will not be coming to the rescue of the metal markets,” INTL FCStone analyst Edward Meir said in a report.

Keeping on the theme of copper’s pessimistic outlook, last week Copper Investing News reported on a technical analysis put forward by Shanghai Cifco Futures Company (SCFC). Copper is headed for a plunge of 16 percent by the end of September, according to the firm. SCFC expects copper prices to touch bottom at $6,037.50.

China matters a lot to copper prices, and recently, things haven’t been looking very good. Another country with strong ties to copper is Chile. With today’s depressed prices and lackluster forecasts, what impact is copper having on the South American country’s economy?

Can copper hurt Chile?

Chile is one of the top three go-to spots for copper. The red metal accounts for roughly one-third of global copper output, about 45 percent of the country’s exports and one-third of the government’s revenue, according to the Inter Press Service.

At the end of April, The Economist took a look at Chile, a country whose economy has benefited greatly from copper mining. Because of the country’s copper endeavors, its economy has expanded roughly 6 percent annually, with inflation and unemployment sitting at “enviably low” rates.

However, this month, Chile reported its Q1 GDP, which came in at a “much weaker than expected” 4.1 percent year-on-year, down from the Q4 2012 figure of 5.7 percent. Furthermore, The Wall Street Journal reported that “seasonally adjusted quarterly growth was just 0.5%, making for an annualized rise of about 2%.”

The reason for the decline? The price of copper.

The red metal has fallen roughly 9 percent so far in 2013, the result of which is being felt by the Chilean economy. The Wall Street Journal reported that on its own, copper accounts for roughly 15 percent of Chile’s GDP.

Copper prices are so tied into the country’s currency that “small shifts in the copper price make headlines” because any fluctuation in copper prices impacts all sectors of its economy, according to The Economist.

Should copper continue to slide, it is likely that “Chile’s central bank [will] signal monetary policy easing, followed by a quarter point cut near term.”

Putting all your eggs in one basket

Investors know that risks are inherent with any investment. While risk tolerance is a matter of personal preference, most investors are not willing to go all in on a single hand. Mitigating risk is important, and one way of doing so is through diversifying one’s assets.

Though Chile has several other strengths, like agriculture and tourism, it may have become too heavily dependent on the copper sector, whose bull may have run its course. Hopefully the red metal’s downturn will spell good news for its other markets; with a weaker peso making exports like beef and wine more competitive abroad.

 

Securities Disclosure: I, Vivien Diniz, hold no direct investment interest in any company mentioned in this article.

Related reading: 

Copper Gets a Pick-Me-Up

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