Financial news

Doctors are famously reluctant to hang up their stethoscopes. But a time comes in the career of every medic when their skills fade, and a gentle push is the best thing for them—and their patients. The same applies for the metaphorical physicians of the financial world, whose ability to diagnose the market’s health changes over time. Now the end may be nigh for the most illustrious of all such physicians: Dr Copper.

Copper, a metal crucial to the construction of all manner of fittings, pipes and wires, has earned its nickname on Wall Street owing to its role as a bellwether for the health of global industry. A surge in copper prices is taken as an early sign of an economic upswing; a big drop is a portent of recession, or at the very least a manufacturing downturn.

So what is going on at the moment? Manufacturing looks peaky. Global industrial output is up by just 0.5% year on year, well below the average of 2.6% over the past two decades, and the rich world is in an industrial recession. A wobble of a similar scale in 2015 sent copper prices plunging by about a quarter. Yet so far this year they are down by only 6%. Futures maturing in 2025 are flat, and those maturing in 2026 are up a bit.

The breakdown in the usual rules of thumb is most striking in China, which consumes over half of the world’s annual copper supply. Its stricken housing market might have led you to think the metal was doomed. After all, investment in property, once a key driver of copper demand, is down by 9% year on year. Curiously, though, Chinese demand for the metal is up by around 10% this year.

The explanation for this lies in the radical shifts that are under way in the energy system. China will install around 150 gigawatts (gw) of copper-intensive solar-energy capacity this year, according to Goldman Sachs, a bank, almost double the amount it installed last year. And methods for storing energy require the metal, too. Pumped-storage hydropower is one example. This involves moving water from one reservoir to another, either to hoard excess energy from wind and solar power or to release it. China already has 30% of the world’s hydropower-storage capacity, at 50gw. Another 89gw of capacity is being built, which will require vast amounts of copper.

Other countries are also spending big on the green transition, and putting in place legislation that will increase appetite for the metal. s&p Global, a financial-data firm, suggests that demand for refined copper will almost double by 2035, to 49m tonnes. Batteries, energy transmission, solar cells, transport—all need the metal. An electric car contains over 50 kilograms of the stuff, more than twice the amount used in a conventional vehicle. Across the world new rules, intended to reduce emissions, will steer consumers towards electric vehicles and away from their copper-light predecessors. In Europe sales of new petrol-powered cars will be banned from 2035.

The squeeze on supplies will therefore be historic, meaning that sky-high copper prices will no longer be indicative of optimism on the part of industrial machinery-makers, construction firms, electronics manufacturers and the like. Instead, rising demand for copper will increasingly reflect a desire among politicians for more environmentally friendly energy, and sometimes also a reduced dependence on imports.

In normal times, building an electrical network from scratch would at least be a signal of greater economic activity to come. However, the energy transition is intended to replace existing activity, rather than add to it. In the case of energy infrastructure, China’s new solar investment this year can generate 150 gigawatt-hours of energy when working at full pelt, which is equivalent to almost 90,000 barrels of oil per hour. That is energy which China now does not need to purchase from overseas producers. The result may well be good for the planet, but it will not have much effect on aggregate economic activity.

With so much of the growth in demand for copper locked in, and proceeding in large part according to legal diktat, the metal’s price will over time say less and less about the state of the global economy, and more and more about the state of the energy transition. Copper prices will still be worth watching, then, albeit for different reasons. Investors wanting a hint about the state of the global economy will be replaced by policymakers wanting a sense of how their green policies are faring. Dr Copper’s retirement may be a sad moment, but it is not the end of the story. ■

Read more from Buttonwood, our columnist on financial markets:
Investors should treat analysis of bond yields with caution (Oct 12th)
Why investors cannot escape China exposure (Oct 5th)
Investors’ enthusiasm for Japanese stocks has gone overboard (Sep 28th)

Also: How the Buttonwood column got its name