By Myra P. Saefong, MarketWatch
TOKYO (MarketWatch) — Copper has a unique ability to gauge global economic trends and the metal’s climb to a more than two-year high speaks volumes about the prospects for the world’s emerging markets.
Copper’s economic sensitivity is so great, in fact, that traders often refer to it as “Dr. Copper,” suggesting that it holds a Ph.D. in economics because of its ability to help predict economic trends.
“Copper is not easily replaceable so often end users cannot substitute” for it as they can for other base metals, said Kevin Kerr, editor of Kerr Commodities Watch. “That is one of the elements that makes copper such a good gauge of real value in the industrial metals.”
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And right now, Dr. Copper’s value gauge is rising off the charts.
Futures prices for the metal climbed to a 26-month high in New York this week, with many investors convinced that demand for the industrial metal will continue to climb from countries such as China and India. Read a story on copper’s price outlook.
“The fact that the price of copper is strong means that investors are becoming confident that the Great Recession is a past story,” said Sam Subramanian, editor of AlphaProfit Sector Investors’ Newsletter. “Backed by economic growth, particularly in emerging markets, demand for copper should remain strong.”
Copper consumption in China, the world’s biggest consumer of the metal, may climb 14% this year, CRU International Ltd. said in April, according to a report in the China Daily. Consumption reached 5.94 million metric tons in 2009, the report said.
In India, copper consumption’s forecast to climb 15% to total 650,000 metric tons by the end of the current calendar year, credit rating agency Icra said, according to a September report in the Business Standard.
The expected increase in copper consumption may sound a bit ambitious when compared to the Asian Development Bank’s forecasts for Indian gross domestic product growth of 8.5% in the fiscal year to March 2011 and estimate of 9.6% GDP growth in China for this year.
Still, “the long-term prognosis that Dr. Copper is sending us is that we will see continued growth and recovery and therefore more pent-up demand for copper and other base and industrial metals,” said Kerr.
Eye on emerging markets
As with any commodity, demand is a key factor for copper – and most of that has been coming from emerging markets.
Europe, Japan and the U.S. make up about 30% of global copper demand, while around 35% comes from China, said Cary Pinkowski, chairman of CP Capital Group. So “if there is a prolonged slowdown it does not matter. China’s growth alone will absorb all new copper production going forward.”
But traders don’t know how much of the copper China’s buying is actually being consumed. It’s “conceivable” that China may be building inventory, anticipating a shortage down the road,” said Subramanian.
Christopher Ecclestone, mining strategist at Hallgarten & Company LLC, warned that “any global hiccup” will be China’s “excuse to dump some warehouse stocks on a bad trading day” and blast copper prices back below $3.20 per pound. Copper futures closed at $3.68 on Thursday. See Thursday’s metals column.