Copper is often viewed as a leading indicator of the health of the economy and the stock market. This is primarily because it is required to make almost all manufactured goods, including homes, cars, and even iPhones. So theoretically, if copper prices are declining, stemming from a lack of demand from manufacturers, it could be because manufacturers are seeing a decline in consumer demand for goods, which results in slower economic growth.
Copper prices were always a leading indicator of the direction of the US economy. Because the economy was so dependent on building growth, markets watched copper to see how much was being used.
That isn't the case today.The stocks of big mining companies are still affected by copper prices. However, it's not the US that is driving it. Copper is a proxy on the Chinese economy. China is the top consumer of copper accounting for 40% of the world's total consumption. As the country consumes large volume of global base metals, developments in its economy and industrial growth would be a prime factor while determining global base metal prices.
The current developments are favouring strong demand outlook after the new Chinese leadership has set the state-led urbanisation projects as a priority sector for growth. As per industry sources, China is expected to import more copper in 2014 as the country steps up building of power networks, rail lines and low-cost homes.
Warehouse inventories of copper are seen cheering markets with the stocks in the London Metal Exchange(LME) easing down to 5.17 million tonnes (MT) from its all-time high of 6.78 MT, which indicates an improved consumption.
But according to the IMF, all is not well for copper. It has lowered the demand outlook for copper. It believes that the Chinese economy will slow further and hence has revised the Chinese GDP growth rate downwards. On the supply front, more copper will be entering the market in the next few years. If demand does not match supply, prices could be in for trouble. According to the International Copper Study Group, an inter-governmental body, there is going to be a surplus of refined copper of 387,000 tonnes, as demand is expected to be virtually flat. In 2014, it predicts demand to rise by 4.4%, but a much higher increase in output will see the surplus widen to 632,000 tonnes.
In the next few quarters, there should be more clarity on where China's appetite for metals stands and also whether the recovery in advanced economies is gaining momentum and spreading to regions such as Europe. The last determining factor will be global liquidity and what the Fed's planned taper does to investor appetite for commodities.