COPPER has fallen sharply in the last week, reaching its lowest level in nearly four years. The metal is traditionally seen as a barometer of global activity although this very long-term chart (which we ran near the market peak in 2011) doesn’t suggest a great deal of reliability. (To update the price from the graph, it is now around $6,400). The price was falling for much of the 1990s when the economy was doing very well indeed. Nowadays the copper price may say more about events in China than elsewhere; although that still is useful.
Chinese data so far this year has been weaker-than-expected; the annual increase in industrial production was 8.6% in Janaury, down from 9.7% in December; annual retail sales growth fell from 13.6% to 11.8% over the same period and fixed investment also slowed. Arguably, of course, China has invested too much already. But the fear is that Chinese overinvestment will lead, not just to falling commodity prices, but to falls in the prices of goods in general. China could then send a wave of deflation round the world, of which falling commodity prices are just an early signal.
Of course, the China bears have been around for many years, arguing that overinvestment and excess credit creation will eventually lead to collapse (Andrew Neil was pushing this story at the National Association of Pension Funds conference last Friday). One problem is that few have great confidence in the Chinese data, which is why they tend to look at other measures (such as metals prices) for an independent view of China’s health.
Any individual metal may be subect to the vagaries of supply bottlenecks, or new discoveries, or even the activities of rogue traders (remember Japan’s Mr Copper?) But it is not just copper this time; the aluminium price is down 10% over the last 12 months, nickel 7.9% and lead 6.3%. Compared with a year ago, metals prices are down 10.2 per cent. With the important exception of oil, commodity prices in general have been weak over the past year (although there has been a recent pick up in food prices); the Economist all-items index is down 5.3% over the last 12 months.
Albert Edwards of Societe Generale points to stories that China’s companies have been importing copper as a vehicle for financial speculation and says that the recent credit crackdown of the authorities may have reduced this practice. He draws an analogy with some of the financial shenanigans that were seen in the Japanese corporate sector in the 1980s.
The puzzle is that equities are also seen as a forward indicator of economic health. Looking at 2013’s buoyant stockmarkets, investors would expect a strong recovery in 2014. But if they look at China’s stockmarket (down in 2013) and at commodities, they would expect the opposite. Perhaps the signals are compatible if one assumes the US can decouiple from China. But it seems more likely that someone has got it very wrong.
13 March 2014 | 3:58 pm – Source: economist.com