Market participants are always scanning every credible source of information to find that one piece of data that can change the outlook and move markets. In this context, many participants looking for the future direction of the global economy look to copper, often called by its nickname "Doctor Copper." This suggests two questions: Does this epithet make sense intuitively and, can the direction of copper prices predict anything else?
Copper is one the of most widely used base metals. Sixty-five percent of the copper that is mined is used in electrical equipment such as wiring and motors, 25 percent is used in industrial machinery and the balance is used in construction for things like roofing and plumbing. It is almost exclusively a manufacturing and industrial base metal. In this context, it's easy to understand the importance of copper as a leading indicator of the manufacturing side of the global economy.
Predictive Powers Weakening?
The United States, however, is becoming less and less of a manufacturing economy so it is feasible to think that copper may have less predictive ability for the U.S. This weakens the predictive power of copper for the global economy given that the U.S. is the world's largest economy. Below is a chart of global GDP growth over the last 10 years along with the price of CME Group copper futures.
Copper Meets the Trade War
There is some similarity to the shape of these line graphs, but it's hardly Ph.D. level work. Has Doctor Copper become Mr. Copper? We say no, the Doctor has not lost its predictive ability, but has become less of a general practitioner and more of a specialist. Copper may now be a specialist in manufacturing economies and specifically a specialist in the Chinese economy. Below is a comparison of copper futures prices to the change in Chinese GDP over the past 10 years.
The similarity is undeniable because China is by far the world's largest consumer of copper. In 2017, when China was experiencing 6.2 percent GDP growth, the country consumed more than double the copper of the rest of Asia combined and more than four times the U.S. The only time frame in which the correlation appears to break down is late 2017/early 2018.
Copper had risen significantly, but in March 2018, President Donald Trump asked Robert Lighthizer, the United States trade representative, to investigate applying tariffs on $50-$60 billion worth of Chinese goods.
As you can see in the charts, China's GDP did pick up slightly in the first half of 2018, following along with the large rally in the price of copper, but leveled off and fell for the balance of the year after Trump's request and the subsequent commencement of the ongoing trade war. Copper has been falling ever since, save for a brief rally at the end of 2018, as planned increases in the initial tariffs were postponed and negotiations between the two economic powers began. Copper prices ticked up and so did Chinese GDP, albeit mildly. Both have since reversed course and are headed back down.
A Measure of the Trade Talks
Given the trade war involving the U.S. and China and all the various opinions on the progress of negotiations between the two nations, copper is likely the best indicator of the state of the trade talks. If copper breaks out, then the Chinese are likely buying copper again and the probability of a deal getting done is increasing. If copper continues to decline, the probability is falling. While there currently is no official CME Trade Deal watch tool (like there is with OPEC production and Fed rate policy), consider using the price of copper futures as your indicator as to whether the trade war is nearing an end or not.
Learn more about trader tools and resources for copper futures.
(This article is sponsored and produced by CME Group, which is solely responsible for its content.)
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