Has Dr Copper Diagnosed a Recession?

Copper prices fell below key support at $4 / lb to a 9-month low over demand concerns despite a strike in the world's largest copper mine. What does it mean?

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Doctor Copper?

Because copper is an integral part of most industrial systems, many view demand for the metal as a sign of the health of the economy. From cars, houses, and cellphones to coffee makers, copper is everywhere. This has led to an inside joke that copper has a "PhD in Economics" as a leading indicator of whether the economy is growing or faltering.

With copper futures contracts back to the levels they were when the world was still worried about the delta variant and many places were still in lockdowns, it is another worrying sign.

Of course, copper isn't infallible, and there could be other issues pushing the price. China's policy of rolling lockdowns, which has extended for more than three months, has weighed on demand. China is the largest consumer of copper in the world. And the primary purpose of copper is still in construction and energy transportation to new buildings. Contracted sales among major Chinese developers are barely half of what it was just a year ago.

Does that mean prices will go down?

Copper's leading indicator status means that, perhaps surprisingly, it doesn't go down as much during recessions. But this is a timing issue; copper's price falls with lower demand. It takes at least six months before a recession can be declared officially. By the time everyone knows a recession happened, the price of copper has already fallen. Then, as governments fight the effect of the recession by increasing spending, demand can push the price of copper up before other assets, even while the media is still talking about a recession.

But that's getting a little ahead of ourselves. The shift away from fossil fuels, particularly following the impetus of the war in Ukraine, means that there is and will be increased demand for copper. That could put a floor under the price - or maybe it already has. Near term though, copper prices could continue lower, at least while China sticks to its zero-covid policy and interest rates keep climbing.

Copper breaks key support

Bullish momentum started to wane last July. Since then, a clear divergence manifested in prices, sending copper to the 38.2% Fibonacci of the 200-500 upward leg near 390. While below 450, where both the 20 and 50 weekly averages rejected bulls within a week, things are looking bearish.

Should downward momentum continue, the next major Fibonacci supports lie at 350 and 315. In between the two, the 330 top from 2018 is critical. If the 38.2% holds firm by the week’s end, another rebound within the downtrend could be seen.

Source: Spreadex trading platform

Key takeaways

Copper's demand is a leading indicator of economic health as it is used in many industrial systems. Demand from China, the largest consumer of copper worldwide, has fallen over the past few months, bringing the metal down.

Its price could continue lower while China sticks to its covid and monetary policy. But if there is a recession, copper might not fall much more as it is a leading indicator and the recession might be priced in already.