Here Is How Copper Prices Could Predict An Impending Economic Downturn

The metal copper possesses strong ability to forecast the turning points in an economic cycles and assess the entire health of the world economy and because of this unique ability it has earned the nickname of "Dr Copper" among insiders in the commodity markets, according to a report in Fortune website.

The Fortune website claimed that the declining copper prices are frequently seen as major signs of an impending economic downturns due to the metal's wide variety of use cases in electrical, industrial, and transportation applications. In the last fews months, "Dr. Copper" has buzzed the alarm loud and clear.

The Fortune report cited that copper futures on the benchmark London Metal Exchange have dipped from the highs of $10,730 per tonne in March to set at $8,575 as on Thursday's close. It is over 20% decline which officially puts the metal into a bear market.

As per Nasdaq's measure of copper prices, the metal has fallen over 17% in just two weeks and is now trading at just $3.74 per pound, after hitting a high in March of over $4.94.

When copper demand dips, it can indicate that the economy is contracting, and that has economists worried about an impending recession. After all, copper has entered a bear market before each of the past four recessions.

David Rosenberg, founder and president of Rosenberg Research & Associates, said on Friday, "Copper below $4 per pound, down over 24% from the highs (bear market), and down to a 16-month low tells me that 'recession' risks have overtaken 'inflation' risks."

Why were copper prices so high, and where will they go from here?
Copper prices have been sky-high throughout the pandemic for some key reasons, according to UBS analysts led by Daniel Major. First, record fiscal stimulus helped support strong economic demand as COVID-19 lockdowns came to an end, leading to a surge in manufacturing. Second, mining and refining disruptions resulting from local protests and facility closures have hampered supply, leading to historically low inventories in every corner of the market, according to the Fortune report.

Beyond that, copper's use in electric vehicles (EVs) has been a huge tailwind for the metal in recent years. EVs use up to 10 times as much copper as conventional cars, according to a recent report from the Copper Development Association. Conventional cars typically use anywhere from 18 to 49 pounds of copper, while the average EV uses 183 pounds, and an EV bus can use up to 814 pounds.

Perspective of UBS analysts

According to UBS analysts, "Copper's exposure to high growth energy transition sectors (EVs & renewables) creates a robust medium-term demand outlook, but its diverse end uses also make copper a barometer of economic activity & industrial production ("Dr Copper")."

But the UBS team believes rising demand from the clean energy transition will not be enough to keep copper prices elevated amid declining economic growth in Europe and the U.S., and a "mixed recovery" from COVID-19 lockdowns in China. And they argue copper will move even lower in the second half of this year and into 2023 as well.

"As a result we expect [copper] demand growth to moderate, but not collapse," the analysts wrote, adding that they expect copper prices to trade between $2.75 and $3 per pound over the coming year.

If they're right, based on historical evidence, it could be a bad sign for the economy, added the Fortune report.