Industrial commodities have always played an important role in the global economy, with many acting as early predictors of potential recessions in the markets. One of the most closely watched industrial metals is copper, with the red metal having a long history of accurately forecasting downturns in the economy due to its importance in the Chinese economy.
As such, many in the markets were shocked when prices for copper reached a fresh, two-year low as manufacturing weakened and worries of a global slowdown continue to fester.
The re-emergence of the inverted yield curves has already done plenty to scare investors, but now it seems that other indicators are lining up as well. Copper fell to its lowest point seen since 2017, extending its already hefty 14 percent decline from this year’s high in mid-April. Prices fell by an extra 0.2 percent on Tuesday and settled at $5,610 per metric ton on the London Metal Exchange.
One key reason came not from China but from America. U.S. factory activity had seen an unexpected decline in August for the first time in three years, further chipping away at the outlook for demand. At the same time, a rallying U.S. dollar has added some selling pressure on industrial metals while China’s onshore yuan fell to the lowest price point seen since 2008.
“The selling has already gone a long way, but we can’t rule out the possibility copper will go lower,” said Xiao Fu, head of global commodities strategy at BOCI Global Commodities U.K., said by phone from London. “If the macro picture remains weak or we see other negative shocks coming into the picture, we could see further sell-offs. There are further risks coming up, given the lackluster backdrop for global demand growth.”
At the same time, while trade negotiations between Washington and Beijing continue to struggle on restarting trade talks, new research has warned that China’s economic growth will fall even further. For Q2 2019, China’s growth fell to only 6.2 percent, the slowest pace its been at for almost 30 years.
China is one of the top consumers of copper in the world. As such, the red metal has often served as a canary in the coal mine for a potential slowdown in the Chinese economy, something that seems quite likely at this point.
The big question for investors isn’t so much whether or not we will have a recession but when. Considering that the U.S. has technically been in a bull market since the 2008 financial crisis, we are quite overdue for a correction.
At this point, most are anticipating a downturn to occur sometime in 2020 or 2021 while economic metrics continue to weaken throughout the rest of 2019. Perhaps the only silver lining to this is that most experts aren’t expecting the upcoming recession to be that severe. Instead, most suspect that it will be a ‘soft’ recession of sorts that won’t be as dramatic as the doomsday bears anticipate it might be.
Until then, industrial commodities are expected to continue falling and there’s not much that investors can do about it.