Who is Doctor Copper?

Why Dr. Copper is more a radiologist than a GP

Dr. Copper
Year-over-year changes to world GDP growth and copper prices 2003-2013. Terence Bell

Often cited by market and commodity analysts, Dr. Copper is of course not a person, but an idea that copper prices have a strong ability to assess overall economic well-being.

While the exact origins of the term 'Dr. Copper' are unknown, it has been in common usage since around 2000, corresponding with copper's rise in status as part of the most recent commodity supercycle.

So why does copper get a PhD in economics?

As the theory goes, because of the red metal's widespread use in critical sectors of the world's economy, demand for the metal can act as a barometer of economic well-being.

A breakdown of the applications for copper show us the breadth of its use:

  • Electrical - 65%
  • Construction - 25%
  • Transport - 7%
  • Other - 3%

As opposed to other base metals, such as zinc, aluminum or lead, copper consumption is more evenly distributed across a range of key industrial sectors including telecommunication, automobiles, construction and machinery. And, whereas precious metals, like gold and silver, are heavily influenced by investor sentiment, to date the affect on copper has been limited. But more on that later.

When we are looking at price trends demand, of course, only provides half the picture. So what about supply?

Soaring copper production could drive down prices regardless of demand. Likewise, a shortage could drive prices higher, without regard to the overall economy.

What we have seen over the past 15 years is fairly steady growth in refined copper production, averaging around 4.7 percent per year since 2000.

Global consumption of refined copper over the same period has increased from 15.1 million metric tonnes (MMT) to 22.8mmt, or roughly matching the average annual increase in production.

With production keeping pace with consumption, prices changes should, in theory, reflect short-term supply and demand issues, changes in the cost of production or external factors, such as speculative buying.

The global price for copper between 2000 and 2014 - adjusted for inflation - increased almost three-fold. Much of this increase has been attributed to Chinese demand for the metal.

China's share of global copper consumption rose from less than 20 percent to nearly 50 percent over this period. The sudden rush in demand led producers to seek new, higher cost sources for the metal, which ultimately drove prices up.

Overall, the copper market does appear efficient, diversified and transparent.

So does this mean that copper deserve a PhD?

A simple chart (top of page) overlapping the year-over-year changes to global GDP growth and year-over-year changes to copper prices does support the idea that fluctuations in the copper market correlate with changes in the global economy.

Whether this means that copper has predictive power, however, is still debatable.

A report by Dutch bank ABN AMRO published in 2014 (link here) examined the correlation between copper prices and a number of measures of global economic activity.

The statistical analysis shows a strong correlation between copper prices and world trade, regional GDP growth in China, the US and EU, as well as oil and gold prices.

Regarding predictive power, though, the report states:

In our view, movements in the copper price can offer valuable insights into the state of the world economy. In this context, the correlations with world trade and the Chinese economy are of particular interest. But we would add a note of caution here, because the relationship between the copper price and these variables remains somewhat of a chicken-and-egg situation.

The report goes on to caution about the influence of investment on copper markets, and how growing use of financial tools may impact pricing. Speculation, the use of copper as collateral and geopolitical issues can all directly impact prices that could reduce the correlation between copper prices and key economic indicators.

So, if Dr. Copper were a physician, he may be better seen as a radiologist rather than a GP. He seems to have an ability to provide certain insight into the health of the world's economy, but not much ability to predict or treat economic illnesses.

Follow Terence on Google+