In the lead-up to August, copper prices saw notable increases. There were also several bullish indicators of note, including higher short-term highs. In short: after months of declines, prices ended up moving sideways. Yet despite this bullish price action, the macro trend still remains bearish, leaving the current market direction unclear.
Unemployment Rate Falls to 3.5%
The growing prospect of a global economic slowdown weighed heavily on commodity prices these past few months. Before the recent base metal price consolidation, which included copper, analysts seemed to be pointing out warning signals left and right. The fear was that the US and elsewhere would soon enter a recession, and it provided the momentum for sweeping downtrends.
However, unlike every other modern recession, the labor market continues to surpass expectations. In fact, according to the Department of Labor’s most recent monthly jobs report, the US economy added 528,000 jobs in July. Furthermore, the unemployment rate – which was already at a historic low – fell from 3.6% in June to 3.5%. This is the lowest the index has been since February of 2020. The combination of an aging population and relatively few immigrants have likely kept the labor market tight in spite of the multitude of other economic pressures.
Reexamining the Link Between Copper Prices and Recessions
Last month, MetalMiner examined how aluminum prices behaved during past recessions. Much like aluminum, copper price downtrends do not exclusively occur within recessions. However, they do invariably and substantially decline during economic downturns. In fact, if you trace their peaks to their lowest points during the last four recessions, global copper prices fell by 20.74%, 20.94%, 64.37%, and 11.07%, respectively.
It’s important to note that, of those four recessions, only two saw price downtrends precede the onset. For instance, during the eight-month-long recession in the early 1990s, prices peaked two months after the official slowdown began. Furthermore, the downtrend continued for an additional three months following the recession before being disrupted by a 5-month uptrend.
On the other hand, during the early 2000s recession, which also lasted eight months, the copper downtrend preceded the start by six months. During that time, prices fell by 11.2%. Incidentally, they hit a bottom one month before the culmination of the downturn.
Learning from History
The Great Recession was the longest of the four, lasting a total of one year and six months. However, copper prices actually peaked four months after the recession began. That downtrend continued for eight months before prices hit a bottom and reversed. It’s also important to note that this bottom preceded the official end of the recession by six months.
Lastly, you have the two-month COVID-19 recession. In this case, copper prices began to decline two months before the slow down, dropping 6.41%. Prices then hit bottom at the end of the recession before entering a sharp uptrend that peaked in May 2021.
Plenty More Bearish and Bullish Factors Remain
Ultimately, whether the US is in or will enter into a recession remains uncertain. And with copper prices in a short-term sideways trend, it’s hard to know what to expect. Fortunately, there are several factors that could help them find a direction.
Both China and the US have designated infrastructure plans that specifically benefit copper, including electrification and power-related projects. In the US, spending related to the Bipartisan Infrastructure Law will take place over the next five years. Meanwhile, the latest tax, climate, and health package adds further investment into green technology like solar panels and EVs. In China, where construction sector accounts for almost half of China’s copper demand, the government’s infrastructure ambitions far exceed those planned by the US. For instance, China’s State Grid recently announced a 500 billion yuan budget for power infrastructure in 2022. This includes a 150 billion yuan ultra-high voltage power transmission line project set for construction in H2 2022.
- China’s Property Crisis
On top of the continued downtrend of China’s property sector, the expansion of the crisis could cause China’s entire economy to spiral. Earlier this year, stalled projects and falling home prices led to a mortgage boycott that has now spread to over 90 cities. In response, hinese authorities have reportedly set up an $11.8 billion fund to help developers resume construction. However, that figure is dwarfed by the losses banks currently face due to the protests, which stand at more than $350 billion. If China’s efforts prove insufficient to contain the crisis, the entire property sector, which historically accounted for around 25% of China’s copper demand and 30% of its GDP, could collapse.
- Chile’s New Constitution
On September 4, Chilean citizens will have the opportunity to adopt or reject a new constitution. If adopted, the new law of the land would have substantial implications on the copper market. Specifically, it could deter foreign mining investment and affect their long-term stability. Furthermore, the decentralization of government laid out in its policies could encourage widespread corruption. Chile represents roughly one-third of the global copper supply, and any limits within the region put pressure on projected supply deficits in the coming years. However, the latest polls suggest the document will be rejected.
By AG Metal Miner
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