copper and the economy

Dryblower on the new economic era (MiningNews.net)


Monday, January 21, 2008


DRYBLOWER'S quiz time: If the price of copper has risen by 10% over the past 30 trading days why has the metals and mining index on the Australian Securities Exchange fallen by 13.4%?


The correct but curious answer is that we are watching a once-in-a-lifetime event as the eastern and western worlds head off in different directions – and copper is perfect proxy for what's happening.

On the stock market, western world events dominate. On the metals market, the east is determining prices.

Where it ends up no one is sure, but it is possible the copper market is telling us the world order, as we have known it for the past 200 years, is changing.

Canny investors will be looking at the metals and financial markets and asking themselves: is there money to be made?

The answer to that question is yes, but since Dryblower is not allowed to give investment advice he'll steer clear of stock tipping and suggest that you find a broker who understands a little more than how to execute a buy-or-sell order.

Okay, so that's possibly asking too much of the children running broking desks, but do your best and shop around.

In the meantime, here's an explanation from an old-timer who likes to think about deeper matters than whether share prices will rise or fall in the next 24 hours.

Let's start with what copper represents.

Once upon a time, as they say at the start of all really interesting economic texts, copper was seen as the leading indicator for all metals. When it rose, other metals followed because copper has the widest spread of applications of all metals with its uses in everything from electronics to plumbing.

Unless there is a major distorting event which Dryblower can't see, then the 10% rise in the price of copper since mid-December (from around $US2.92 a pound to around $US3.24/lb today) means someone is buying the metal, either because they need it to make pipes, or they're speculating on future demand outstripping supply.

Whatever the reason, the simple fact is that copper is telling us one thing and the financial market another.

The only reason for this is that demand in the real economy, especially in China and other fast-growing markets, remains strong while the financial market is rocked by the crisis of confidence gripping the United States.

The buzz word for this separation of the eastern and western world is "de-coupling", and while Dryblower does not believe the US has totally de-coupled there is evidence that it is no longer the dominant force it was during the 20th century.

A few numbers explain that point.

Between 2000 and 2006, America's share of the world economy fell from 31% to 27.7%.

Seven years ago the value of stocks listed on American stock exchanges represented close to 50% of all stock exchanges around the world. Today it is less than 33%.

Has American disappeared? No.

Is it shrinking? Not yet.

Is it becoming less important? Most definitely.

Is it still the major market for commodities, the metals, minerals, and fuel, which interest readers of MiningNews.net? Absolutely not.

If the copper price trend doesn't do it for you, look at the other items of evidence, such as the western and eastern worlds moving in different directions – just as the British poet Rudyard Kipling said in his Ballad of East and West.

Other metal prices over the past 30 days are down, but modestly, and far less than the 13.5% suffered by the mining share price index. Gold is up, a direct reflection of the fall in the US dollar – which is itself a mirror on the US economy.

More evidence is required to demonstrate the new world economic order. It is also difficult to imagine the US declining in importance without causing some disruption to trade and investment flows.

But, that takes us back to copper, its role as a bellwether for all metals, and a pointer to future economic activity – as opposed to the financial gyrations of the US banking system's failure.