Dr. Copper Catches the Flu

The thinning in copper prices should put investors on the defensive

   

One of the most important metals has gotten a bad case of the sniffles … and no, we’re not talking about gold.

While the precious yellow metal seems to struggling as well, it’s copper — one of the world’s biggest economic indicators — that is under the weather.

Copper prices have been under pressure recently amid concerns about the global economic outlook and its impact on future demand for the red metal. Prices for copper have fallen to nearly 18-month lows as global growth fears have taken hold. Recent data out of China — the world’s largest consumer of the metal — aren’t helping matters.

Given that copper is one of best leading economic indicators — hence its “Dr. Copper” moniker — we could in for a rough ride this summer.

When China Sneezes …

Used in a variety of infrastructure, power-generation and manufacturing products, copper is sensitive to the whims of the global economy. That sensitivity is becoming a big problem for investors and producers of the metal as the global economic picture clouds up.

Earlier this week, the International Monetary Fund cut its 2013 forecast for global GDP growth to 3.3% — down from its earlier projection of 3.5%. At the same time, it also trimmed its 2014 forecast down to 4.0%.

The growth cuts came as a result of the subdued U.S. and eurozone outlooks. The IMF estimates that various budget cuts and tax increases in the U.S. will reduce overall growth. In fact, the forecast seems to be coming true already, as retail sales contracted in March for the second time in three months and consumer confidence has slipped.

Meanwhile, the eurozone’s austerity measures, along with other debt “issues,” actually are expected to cause the region’s economy to shrink 0.3% in 2013. That’s a big problem for copper as Europe is the third-largest consumer of the industrial metal (the U.S. is No. 2).

However, the biggest concern for the red metal stems from China.

The Asian Dragon is the largest consumer of the metal, driving roughly 40% of copper demand. As China enacted various stimulus policies to modernize and develop its infrastructure, consumption of the red metal skyrocketed. (Its power-generation sector alone accounts for almost half of consumption.) And at one time, China had drained the world’s copper inventories to just eight days’ worth of supply.

However, the building binge seems to be waning. China announced ahead of the IMF’s estimates that its economy grew less than expected. The Chinese economy has struggled in the past few years as measures to cool inflation and red-hot property markets worked better than expected. Beijing recently began the process of jump-starting growth again, but these policies haven’t worked as quickly as analysts had hoped.

All in all, slowing factory output and investment spending in China has led analysts to start slashing full-year growth forecasts for the world’s second-largest economy. The IMF predicts that China will grow at 8% this year, down from January’s predictions of 8.2%.

… Prices Fall

With these global growth factors now pointing in the negative direction, copper prices have plunged.

Copper prices have sunk 20% since its February 2012 high of $3.98. On the New York Mercantile Exchange, copper set for May delivery — which is currently the most actively traded futures contract — fell to $3.17 per pound, and at one point, the contract dipped as low as $3.06. The current front-month contract for copper also plunged 1.1% to reach $3.15 per pound.

And in London, copper prices fell below $7,000 per metric ton for the first time since October 2011.

All of these drops mean the metal has officially reached bear market status.

Time to Get Defensive?

Overall, copper prices suggest that the global economy is rapidly slowing, and the risk of a recession has increased.

With copper’s recent fall from grace, investors might want to prepare for rougher seas ahead by raising cash, betting on strong dividend stocks and reducing their risk profiles. While I don’t think we are in for the Great Recession: Round Two, the recent troubles in China are … well, troubling.

The same can be said for the slowing growth in the U.S. and the estimated return to recession in Europe. That’s not necessarily a great environment for higher copper or commodity prices.

In due course, we’ll get some big bargains in the market — including the copper producers like Southern Copper (NYSE:SCCO) and Freeport-McMoRan (NYSE:FCX).

But there’s no need to rush. Given how Dr. Copper has acted recently, we could be in for more downside. So for now, the best offense might just be a good defense.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/04/dr-copper-catches-the-flu/.

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