Is There a Way to Predict Economic Recession?...The Secret of 'Dr. Copper' [Seungseop Song's Financial Light]

Economists Say "Economy Changes with Copper Prices"
Aligned with 1920 Great Depression and 2008 Financial Crisis
Copper Used in Various Industries Acts as an "Economic Weather Vane"
Recent Green Transition Lowers Predictive Power

"Dr. Copper is falling. But it doesn't seem like the economy will fall like Dr. Copper. Dr. Copper's predictive power has declined significantly. Dr. Copper should retire."

This is an excerpt from a foreign news article in the United States. It appears to criticize the ability of a person named Cooper. However, Copper is not a person's name but refers to the metal copper. The metal mineral was nicknamed "Doctor."

How did copper come to earn a doctorate degree? Economists discovered that copper possesses an exceptional ability: economic forecasting. They found that when copper prices rise first, the economy follows with growth, and when copper prices fall, a recession follows. Predicting whether the economy will improve or worsen is very difficult, but by paying attention to copper, one can predict economic conditions, hence the nickname "Doctor." The nickname "Dr. Copper" became popular among investors in the late 19th century and was adopted by economists in the 20th century.

Since copper futures began trading on the London Metal Exchange in 1887, Dr. Copper has demonstrated quite accurate predictive power. A representative example is the copper price decline in the 1920s. At that time, copper prices were continuously falling. Then, in 1929, the stock market essentially collapsed, leading to the Great Depression. After rapidly rising since 2003, copper prices stalled in 2007, followed by the global financial crisis in 2008.

Why does copper move in tandem with the economy? Copper is used in various industries. There is no place where copper is not used, whether in households or industries. Copper is also essential in various electronic products and in electricity and power transmission. Especially in construction, copper is necessary. The Copper Development Association (CDA) analyzed global copper usage and found that 46% of copper is used in building construction. In other words, an increase in copper demand and prices means the economy is becoming more active. Conversely, if copper demand is low and prices fall, the likelihood of an economic downturn is high.

Copper is particularly closely related to China. According to a 2022 study published by the Chicago Mercantile Exchange Group (CME), copper prices showed strong correlations with various assets such as oil, gold, and silver, but especially higher correlations in China. China accounts for half of the world's copper consumption. High copper prices usually indicate a strong Chinese economy, and if China's economy is strong, the global economy tends to be strong as well. This is why copper is called the "barometer of the global economy."

So why do experts say Dr. Copper should retire? Recently, economists believe copper's economic forecasting power has significantly declined. Last year, China's copper demand increased by about 10% compared to the previous year. According to the usual pattern, China's economy should have revived. However, real estate investment in China, where copper is used, decreased by 9% compared to the previous year. There were even concerns about a real estate-driven economic downturn.

The cause of this phenomenon is attributed to "green policies." Electric vehicles and solar power use enormous amounts of copper. The more aggressively green products and facilities are expanded, the more copper demand increases. According to Goldman Sachs, China doubled its solar energy installations using copper in 2023 compared to the previous year. The rise in copper prices was due to the transition to green energy, not because construction and manufacturing improved.

What about current copper prices? Copper prices are currently in a downtrend. The 3-month copper futures price on the London Metal Exchange (LME) was $9,148 per ton as of the 15th. Considering that the price reached $10,889 per ton last May amid the AI boom, it has fallen nearly 16%. As a result, individual investors have shown great concern about a recession, selling copper-related exchange-traded funds (ETFs).

However, institutional investors have taken this as an opportunity to buy copper-related products at low prices. Unlike the selling spree by individuals, institutional investors have been buying. They likely believe there are many positive factors for copper prices to rise in the mid to long term. It is difficult to judge whose assessment is correct at this point. The important thing is to avoid relying excessively on a single indicator when assessing economic conditions.