The Sliding Price of Copper Heightens Fears of Recession

Over the past couple of months, severe supply chain disruptions, rising costs of living and attempts by the feds to forestall inflation have increased fears of a recession among investors.

During such speculative times, investors often look to assets such as copper to help predict the health of the economy and pinpoint potential turning points in economic cycles. For dozens of years, investors have been able to predict downturns and upturns in the economy by studying copper prices, earning it the name Dr. Copper in the commodity markets.

Increases in copper prices are seen as a significant indicator of an upsurge in the economy while dips in copper prices are seen by many as a warning sign that the economy is in for a downturn. This is because copper is an extremely versatile metal with numerous transportation, industrial and electrical applications.

For the past couple of months, copper prices have trended downward, increasing fears of an incoming recession among players in the financial markets. In March for example, copper traded on the London Metal Exchange at $10,730 per ton. But as of last week, copper prices on the benchmark exchange had dropped by more than 20% to $8,575 per ton.

On the NASDAQ, copper prices dipped by more than 17% in only two weeks after enjoying record prices of more than $4.94 in March and hitting a 17-year low of $3.74 per pound.

Reduced demand for copper is often a primary driver for drops in copper prices. And in the past, decreased copper demand has often preceded a period of economic contraction.

The fact that copper has fallen by more than 24% and is now trading at less than $4 per pound, a first in nearly 17 months, shows that recession risks have now surpassed inflation risks, said David Rosenburg, president and cofounder of Rosenburg Research & Associates, These historically low prices come after copper enjoyed high prices toward the end of the coronavirus pandemic.

Analysts from UBS attributed this rise in copper prices to several factors. First, the lifting of lockdown orders coupled with an increased fiscal stimulus led to an upsurge in manufacturing and significantly increased demand for copper. Second, disruptions in mining and refining due to plant closures and local protests hindered supply and resulted in an industry-wide shortage of supply.

Furthermore, the use of copper in the emerging EV industry, where the average EV requires 10 times more copper than a fossil fuel car, has also had a major effect on the demand.

Still, UBS analysts believe that rising copper demand will not be enough to prop up copper prices as economic growth in the United States and Europe slows. That notwithstanding, established copper extraction companies such as Freeport-McMoRan Inc. (NYSE: FCX) may not be too concerned about this downturn since copper is unlikely to remain depressed for long because it has a multiplicity of uses.

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