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Impact of economic slowdown fears on Copper prices

27 Sep 2022 0 COMMENT

The red metal—copper—is considered as an economic barometer because of its widest usage in various industries. This metal describes the economic health of the nation; therefore, it is called Dr. Copper. Copper is the preferred and safest conductor of electrical wiring in buildings due to its remarkable strength, ductility, and resistance to creeping and corrosion. Copper supply and demand are influenced by economic, technological, and sociological variables.

The economic growth of a country is determined by its Gross Domestic Product; growth in the manufacturing and services sector; growth in the industrial sector; growth in personal consumption and spending; etc. Metals in general, and copper in particular, are used in all of these economic growth parameters.

Copper price action since outbreak of COVID-19

An outbreak of COVID-19 in late 2019 in China and spreading across the globe in later months was a masterstroke for growth of the global economic condition. This outbreak put everything on a stand still thereby having its great impact on the financial market.

Because of lockdown and shutting down of economic operations, the copper supply was hit badly because of closure of mines and smelting units. As a result, copper prices reached an all-time high and even traded above $10000 per MT on the London Metal Exchange. The rally in copper prices, along with other commodities such as crude oil, other metals, and agricultural commodities, led to a rise in inflation, causing recessionary fears in most of countries. COVID worsened the economic health of many nations and even put many nations into economic depression.

Since reaching a record high in March, copper has lost more than 30% of its value as central banks have accelerated rate increases to combat decades-high inflation, raising concerns of an impending economic slump. The dollar has reached its highest level in two decades as a result of rising U.S. interest rates, making dollar-priced metals more expensive for non-U.S. customers and possibly reducing demand.

In early 2022, copper prices soared to their all-time high due to the war between Russia and Ukraine. The market expected copper prices to remain higher due to supply disruptions caused by the war, but fears of a recession gripped the market, reducing demand for the red metal. China’s demand for copper hit by an intermittent surge in COVID cases, which is disturbing its supply-demand scenario. Copper prices are largely impacted by China’s industrialization and rapid economic growth. Today, more than 50% of the world's copper demand comes from China alone.

To control the higher inflation, central banks are constantly increasing their interest rates to bring the economy on track, and this effort will continue till the end of 2022 until the economies are stable. Further, with a severe energy crisis in 2021 due to a supply shortage of coal and other sources of energy as well as many countries focusing on green and cleaner energy, the copper mining and smelting industry is receiving a big jolt. This is also impacting the copper market to a great extent. Apart from these challenges, the copper industry is receiving repeated jolts in the form of labor strikes, which are intermittent.

Base metals have experienced their worst quarter from April to June since the 2008 financial crisis. In July 2022, copper prices dropped to a 20-month low on fears of a recession, which would dampen the demand for the red metal. Since March, the Federal Reserve has raised the fed funds rate at each meeting, and it is now at 2.25%-2.50%. A higher interest rate regime might continue until the Fed feels the economy is on a growth trajectory. All these factors are having a greater impact on the metal market.

As the world is reeling under the distress of higher inflation, lower industrial growth, and fluctuations in the manufacturing sector, it is likely to have a negative impact on the copper market in the near term.

In its July monthly World Economic Outlook report, the International Monetary Fund reported that world economic growth looks gloomy and more uncertain. It is projected that the global economy would grow at 3.2% in 2022 against an April projection of 3.6%; advanced economies' growth projection was lowered to 2.5% from 3.3%, and emerging markets and developing economies' growth projections were kept unchanged at 3.6%. Advanced economies are the most vulnerable to the growth of the global economy. Hence, the focus of the world during the rest of 2022 is on how the governments and central banks work to stop the world from slipping into recession.

Summary

Copper—most widely used base metal—is looking for strong demand from its top consumer i.e., China. Further, stability in inflation and no aggressive interest hikes by the United States are likely to keep the copper market is a stable mode. Once the world completely comes out of fears of COVID-19, then we can see stable growth in the copper supply and demand situation.

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) and having SEBI registration no. INZ000183631. Name of the Compliance officer (broking): Ms. Mamta Shetty, Contact number: 022-40701022, E-mail address: complianceofficer@icicisecurities.com. Investments in securities markets are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The securities quoted are exemplary and are not recommendatory. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.