- When you’re ill, it often pays to get a second opinion.
For many years now, investors have turned to ‘Doctor Copper’ for an indication as to the health of the global economy. The red metal is used in everything from construction to white goods to kitchenware, and so it’s seen as a pretty accurate indicator of economic health.
But some argue copper’s lost its mojo.
According to Eugen Weinberg, head of commodity research at Commerzbank, all the red metal tells us about is the state of some large emerging markets, and, more specifically, China. It may even be in danger of going the way of the Baltic Freight Index – a previous barometer for trade activity based on transportation rates that has fallen out of favor (and was replaced by the Baltic Dry Index).
Aluminum, they say, may now be a better consultant.
“Copper’s relative position has deteriorated,” said Stephen Briggs, a base metals analyst at BNP Paribas. “Yes, it’s used in lots of different things, but … aluminum is [also] used widely.”
The aluminum market in more than twice the size of the copper market, and more than 50 million metric tons are produced every year, compared to 20 million tons of copper that is produced each year. It’s also used in a similarly vast range of products – from cans to cars.
On the downside, aluminum is more closely tied to oil and energy prices, because energy accounts for 40% of the cost of production. And critics say that distortions in the market, such as the high extra fee of getting the physical metal delivered, mean its thermometer isn’t better than copper’s.
There are those that are sticking by their tried-and-trusted physician. The aluminum market may be larger, but it’s not a direct substitute. More importantly, it’s not used in heavy construction – usually considered a key gauge of economic activity.
Additionally, copper is significantly more expensive and if the market could have shaved off costs by using aluminum it likely would have.
“With the price differential being almost four times that of aluminum, you would have seen wholesale replacement of copper … and you’ve only seen 10% of total demand being lost to aluminum, so that is pretty minor in my book,” said Robin Bhar, a metals analyst at Société Générale.
In part, this discussion has arisen because of the complexity of the world economy’s ails. Industrial metals are struggling to provide a clear picture of what’s going on. That’s compounded at the moment because both copper and aluminum markets appear to be swamped with supply. Once that’s out of the way, copper may become more reliable once again.
“I would say Doctor Copper, not Doctor Aluminum. Maybe ‘junior doctor’ Aluminum, but the consultant would still have to be Copper,” said Mr. Bhar.