DR. COPPER NEEDS LESSONS IN CHINESE MEDICINE / THE WALL STREET JOURNAL

Dr. Copper Needs Lessons in Chinese Medicine

Copper, iron ore and Chinese growth are all telling different stories—that’s worrying

By Nathaniel Taplin

Copper rods at a cable factory in Vietnam. China, which consumes about half of the world’s copper supply every year, reported slower economic growth in the third quarter of the year. Photo: kham/Reuters


Copper, the metal which Wall Street loves to pretend has a Ph.D. in economics, is these days a close student of Chinese medicine.

With that in mind, investors agog at commodities and U.S. equity benchmarks testing new highs should consider the following: Chinese GDP growth just ticked lower for the first time since first-quarter 2016. It wasn’t a big move—data released Thursday showed third-quarter growth edged down to 6.8% from a year earlier, versus 6.9% in the first half. But it does mean that the synchronized growth uptick for the world’s biggest economies is probably nearing an end.

Given that, and the enormous weight of China in global copper markets (it consumes about half of global supply every year), it may be difficult for the red metal—often nicknamed Dr. Copper because of the way its fortunes often herald global economic shifts—to keep rocketing higher. It broke through a three-year high this week, briefly heading above $7,000 a metric ton.

RED HOT?
Metal prices index vs China real estate

Other key industrial commodities like coal and steel may also start to lose some of their punch.

One reason for skepticism that the commodities rally can maintain momentum is the breakdown of a key correlation in recent months. For most of the past decade, copper and iron-ore prices both moved more or less in lockstep with Chinese real-estate investment, the biggest driver of global metals demand. But in 2017, a curious thing has happened: property investment has trended sideways, but copper has gained nearly 30%. Iron ore, meanwhile, is down around 15%.

Some of the difference is clearly on the supply side—iron ore arguably suffered the worst of the mining industry’s investment binge in the late 2000s and early 2010s, and will likely remain in substantial oversupply for years.

The bullishness in nonferrous metals, and in steel, is also being driven by China’s drive to shut outdated aluminum and steel furnaces, as well as rumors of planned curbs on copper scrap imports. But with Chinese investment growth hitting its lowest level of the new millennium for the second month in a row this September-—and no clear signal on U.S. growth—expecting moderate supply cuts to carry the entire metals complex much higher smacks of wishful thinking.

China isn’t collapsing but it’s clearly slowing. Policy signals coming out the nation’s twice-a-decade Communist Party leadership conference are emphasizing political control and deleveraging, not speedy growth.

Commodities and U.S. equity investors mesmerized by multiyear highs should cast a careful eye on developments across the Pacific.