Tuesday, April 21, 2009

Copper as leading economic indicator, Part 2

Weekly chart of Copper May 2009 future price:

(click to enlarge; source: WSJ Online)

To follow up my previous post on Copper as leading economic indicator, here I show you some recent data (courtesy of BCA research) that seem to confirm the story.

The first graph looks at the correlation between copper price and global industrial production (IP). Several interesting observations out of the graph: 1) Copper price is more volatile than IP in recent years (since 2000) as well as late 80s. 2) The predicative power of copper started to show up in early 90s; before that, copper was more like a coincident indicator and sometimes even lagging indicator. This, I suspect, may have something to do with China's integration into the world economy since 90s. 3) Recently, the copper price started to turn the corner. Does this mean the world economy may soon turn the corner, too? Read on...

A counter argument could be: China has been strategically buying copper at very low price (see graph below), but the buying itself does not mean China is having an economic recovery. To link copper price to economic rebound, we need to see the real "green shoots" in the Chinese economy.

So where are the green shoots? Chinese government has been increasing money supply and loan growth sharply (see graph below) to counter the deflationary pressure and stimulate the economy. And the effect was quite effective. At least, China does not have the problem of banking not lending.

In export sector, there are also signs that Chinese economy have turned the corner (see the graph below).

Personally, to make the copper story more convincing, I'd like to see the data of copper inventory flow --- then we can decipher how much copper purchase was pure strategic buying from China and how much was due to actual recovery.

To summarize, I am cautiously optimistic about China's outlook.