[miningmx.com] — THE fall in the copper price caused a great upset on the JSE in mid-January and share prices fell sharply. Even investors in quality industrial and financial shares, such as Remgro and all South Africa’s large commercial banks, were forced to watch while the value of their investments fell by nearly 10%. And all simply because the copper market collapsed in Shanghai in particular, where the Chinese do their buying.
Even the value of the rand fell sharply against the US dollar, from a very sound $1/R6.88 on the first day of the new year to $1/R7.25 just three days later.
Investors may rightly wonder what the price of copper has to do with us, because South Africa produces very little of the metal, with Palabora Mining Company the country’s only listed copper producer. (The other listed stock is Zambia Consolidated Investments which is an investment company with a 28.4% stake in Konkola Copper Mines.)
The answer is nothing – but also everything. The past month has shown that no serious investor in our shares, and no foreign exchange dealers, should fail to watch the copper price carefully on a daily basis.
The graph below of the copper price over the past year tells its own story clearly.
Early last year we enjoyed unprecedented prosperity on all our markets. The JSE, driven especially by consumer shares and the financials sector, was at a new high and the rand was trading at less than $1/R6. Then everything suddenly collapsed on 10 May. The value of the rand weakened to almost $1/R8 and the price of shares – especially of South African ones, such as those of the retailers and the banks – fell sharply, some by as much as 40%.
At that time we attributed it all to a sudden weakening in confidence in emerging markets plus surprising indications that the US might have to lower its interest rates even further.
Nonsense, say the supporters of the copper price theory. It’s because the price of copper fell sharply in May and June last year after an almost impossibly sharp increase over the preceding two months. The graph of the copper price over the past 12 months illustrates that event.
The best of all is that the recovery in the price of copper from mid-June last year again gave our investors a warning of almost 30 days that share prices were going to rise. And that happened, which ensured a marvellous Christmas season for investors.
However, from November 2006 the copper price began losing its shine again and it should, even at that stage, have been a warning to investors that the Christmas run in share prices being enjoyed worldwide was resting on a shaky foundation.
The first four trading days of the new year were very bad for the copper price, so it’s no surprise that all share markets suddenly came under pressure. In fact, the weak copper price is now indicating that investors should currently avoid shares at all costs. The currencies of emerging countries could also again weaken against the US dollar, even though those countries have no direct or indirect interest in copper.
But why is copper and its price so important? In brief, because the demand for copper and the copper price are the best cautionary indications of how the world economy is faring. A revival in world economic growth is first of all observed in copper and its price. A five-year graph of the copper price shows that it’s increased more than fourfold since 2002, when the current growth phase in the world economy started.
In its survey on copper, the London Metal Exchange – where copper, incidentally, is the most important metal – gives a clear explanation of why the consumption of copper is linked so closely with economic growth. The LME points out that between 1900 and 2000 the world demand for copper grew from 500,000 tons/year to 13 million tons/year – an increase of 26 times.
Japan uses two kilograms of copper per capita per year, North America about 10kg and Europe 9kg. The large populations of China, India, Eastern Europe and South America still use less than two kilograms per capita per year. That’s an important indication of what can happen with any future demand for copper. South Africa’s use of copper per capita probably also falls into that category.
Copper is closely linked with economic prosperity. The building industry represents 50% of total demand and it’s well known that in the US that industry isn’t doing at all well. To wire and plumb a new house probably requires quite a few kilograms of copper. The price of the metal really may be a good indication of how economic growth is faring.
Copper is produced largely by the US, Asia and Europe. Africa and Australia, with their large mineral riches, produce around 3% and 4% respectively of the world’s copper.
The reply to the question about what the fall in the copper price has to do with South Africa is easy: nothing. But if the copper price falls because economic prospects in the US are weakening, then a weaker US economy spills over into emerging markets – and, due to South Africa’s large current account deficit, South Africa is now one of the most vulnerable of those. That’s when a sharp fall in the copper price, as experienced over the past few days, causes havoc with the share price of Remgro, which invests largely in tobacco and banks and has absolutely nothing to do with copper.
Weaker economic prospects in the US also mean that the currencies of emerging markets remain under considerable pressure, as happened in May last year.
Foreign exchange dealers would be well advised to watch the copper price. If it falls further over the next few days the value of the rand could again easily weaken to $1/R7.50, or even more.
The faithful supporters who watch the copper price carefully and apply that to their investments in shares and currencies were surprisingly accurate over the past few months. However, there are nevertheless a few questions from outsiders who aren’t completely convinced.
Their argument is that financial speculation by hedge funds contributed a great deal to the abnormal increase in the copper price and that it’s also the funds that caused the latest fall. The same thing is currently happening with the crude oil price, which is also falling.
Of course, that’s true. But as long as copper plays an important role in the world’s economic welfare and, more importantly, as long as its price can sway sentiment on financial markets, as over the past week, every investor should keep a close eye on it.
