Dr. Copper’s Patients Are All Ill

Beckett Bronze produces cast bronze precision-machined parts and continuous cast bars. Castings are manufactured at the East 20th Street plant. The West 23rd Street plant produces finished machined parts and has about 75 machine tools including CNC lathes.

If you believe “Dr. Copper” really does have a doctorate in economics, you should be deeply worried right now.

Prices of copper, used in everything from buildings to cars, have collapsed in recent weeks. Prices on the London Metal Exchange are trading around $7000 per metric ton, down 26% from the beginning of June and a stunning 32% since the end of March. Even some of the biggest copper bulls have begun to sound a bearish note. Goldman Sachs now forecasts $6,700 a ton in the coming three months—and a possible move below $6,000 in the case of global recession.

Part of the slide is due to the bearish sentiment chewing away at nearly every economically sensitive asset. But the problem is undoubtedly specific to copper too. China, which consumes about half the world’s supply, is in deep trouble. The U.S. appears likely to head into recession. And Europe faces the prospect of a deep industrial downturn this winter if Russia turns the screws on gas supply. In a scenario like that, copper has nowhere to hide. The seemingly endless rally in the dollar, which makes commodities priced in dollars more expensive abroad, is simply the coup de grace.

The slide in copper prices began after China imposed widespread lockdowns in April to defeat a large scale Omicron outbreak. And while the Chinese light industry and exports have begun to bounce back, its property sector—the largest source of global copper demand—is in deep trouble. Data released Friday showed property investment falling 9.4% year over year. Many home buyers who are paying mortgages but have yet to receive their actual apartments are threatening to withhold payment.

Meanwhile there is still no clear sign of when China will abandon its rigorous “dynamic zero covid” policy, which entails frequent testing and targeted, aggressive lockdowns when necessary.

Nick Pickens, copper research director at Wood Mackenzie, believes that even though many Chinese cities across China are reducing mortgage rates for first-time buyers and easing home purchasing rules, consumers and companies are reluctant to spend amid the continuing uncertainty. For now, it’s clear China is unlikely to stage a strong recovery to make up for a possible recession in developed markets.

If that recession comes, it could be particularly nasty in Europe, given the region’s high exposure to global energy prices. The biggest pipeline carrying Russian gas to Germany began annual maintenance last week, but markets are worried the shutdown could be extended—and that Russia may play the gas card in earnest this winter to pressure Europe over Ukraine. If that happens, energy rationing is likely. According to Australian bank ANZ, a 10% cut in European manufacturing activity, which is highly dependent on fuel supply, could reduce the European Union’s gross domestic product by 0.5% to 1.0% in any one quarter.

If there’s one saving grace, it’s that inventories are relatively low. London Metal Exchange copper stocks stood at just over 130,000 tons on Friday, up 47% from the beginning of the year but less than half of where they were five years ago. Stocks in Shanghai are also sitting at low levels by historical standards. If the U.S. and Europe do better than expected, that could help offset some pressure from China. But it probably isn’t enough for a significant rally until the Middle Kingdom turns the corner.

Copper’s forecasting skills are a matter of lively debate. But with China’s economy showing few signs of life—and the current economic expansions in the U.S. and Europe in mortal peril—it’s hard to argue with the bearish signal it is sending right now.

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Write to Megha Mandavia at megha.mandavia@wsj.com

Appeared in the July 19, 2022, print edition as ‘Copper Sends Bearish Signal’.

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