12 Nov 2019 21:39 IST

What does copper consumption say about the economic slowdown?

‘Doctor Copper’ is often considered an indicator of the economy’s health; here’s how that works

With global and domestic economic activity in the doldrums lately, many have been trying to measure how bad the slowdown is and if it will persist in the long term. One of the indicators traditionally used to gauge the health of the economy is the price of copper, which reflects the metal’s demand in the market. Due to its ability to predict turning points in the global economy, the orange metal is often called ‘Doctor Copper’.

Copper is a base metal that has versatile applications across utilities — heavy industry, transport and communication. This wide range of applications is what makes copper prices a bellwether indicator of the twists and turns of the economic cycle.

A few precedents prove that copper consumption is closely related to health of the global economy. In the last 30 years, the growth rate of copper usage globally was negative only in five years. Out of these five years, an economic slowdown was evident in four. In 1990 and 1991, on account of the spike in global oil prices; in 2001, because of the impact of the dotcom bubble (or the tech-bubble), and in 2008, in the wake of the financial crisis in the US.

However, there is another school of thought which believes that the trend of copper prices has decoupled from global economic activity in the past few years.

But assuming that the concept of Doctor Copper still holds good, let us look at current copper use, price trends in the metal, and what they signify about global and domestic economies.

Note that the analysis is for a calendar year in the case of the global economy, while it is the fiscal year for the domestic economy.

Global slowdown

According to the International Copper Study Group (ICSG), the usage of the metal globally during January to July 2019 was 14.2 million tonnes (mt), which grew by about 0.5 per cent Y-o-Y. This is against an average growth rate of about 2.8 per cent in the last five years.

The ICSG’s growth forecast for copper consumption for the whole year 2019 is much weaker, at just 0.3 per cent, on the back of lower than expected growth in Chinese demand and a significant decline in the EU’s usage. That is the slowest growth rate after 2009, when copper consumption was just 0.1 per cent.

While this suggests that the slowdown is real, some might argue that demand was impacted by supply restrictions in the year for various reasons, such as protests in Chile, the top producer of the metal.

However, Ravindra Rao, VP-Head Commodity Research from Kotak securities, says: “Despite supply constraints the cumulative inventories across exchange warehouses have risen year to date while copper prices continue to hover below $6,000 levels suggesting a bleak demand outlook.”

The movement of international metal prices may not be just a pure play of demand and supply but is also impacted by such other factors as functioning of global trade and political environment. But copper prices falling from above ₹7,000 per tonne in 2018 to less than ₹6,000, while impacted by global trade uncertainties to a great extent, also indicates weak demand for the metal, thus reflecting weakness in the global economy.

Domestic consumption

In India, demand for copper is largely dependent on segments such as electrical and telecommunications (56 per cent), building and construction (8 per cent), and automobiles (11 per cent), as per a report from CARE Ratings.

The reports also states that consumption of the metal in the first four months of the FY20 was 167 kilo tonnes (kt), up by 17 per cent compared to a year ago. But this is due to the low base effect in FY18, when consumption growth fell by 15.3 per cent to 142 kt on account of increased use of copper scrap in the electrical and electronics and consumer durables industry.

Mixed outlook

The ICSG estimates that copper consumption will grow around 1.7 per cent in the year 2020 due to infrastructure development in major countries such as China and India and the global trend towards cleaner energy. This is despite the low base effect in 2019 with weaker consumption (growth of 0.3 per cent).

This suggests that the global economy is likely to recover, going ahead, but at a slower pace.

In case of India, rating agencies CRISIL and CARE Ratings estimate that copper demand will be around 7-8 per cent and a healthy 9-10 per cent, respectively, in FY 2020. This is on the back of an expected increase in expenditure from the Centre and growing demand from the power sector, apart from the thrust on renewable energy and increasing demand for consumer durables, indicating an economic recovery in FY20.