Copper prices slump vs other commodities is ominous

One way to better assess the likely global impact of copper’s year-to-date double digit decline is to gauge its performance relative to other commodities.

Year-to-date, copper is down 13%, while the Reuters/Jefferies CRB Commodity Index is up 8%. The 20% decline in the copper/CRB ratio year-to-date makes this the biggest divergence between copper and the rest of commodities since the peak of the Eurozone debt crisis in 2011.

Today’s copper sell-off stands out from more conventional declines as it is the result of a supply glut emerging from Chinese companies’ use of the metal as collateral to obtain cheap-US dollar financing and invest the proceeds in higher yielding Chinese yuan. But the yuan’s depreciation of the past 7 weeks combined with copper’s 11-week sell-off has forced companies to sell their copper holdings and cover their appreciating USD-based loans.

But copper’s decline is more than just a case of unwinding trade financing. The slowdown in China’s macro dynamics has broadened throughout the credit and wholesale factory chains. The latest PPI figures showed a 2.0% drop in February y/y– the 23rd consecutive monthly decline and the longest periods of wholesale price contraction since the 1990s. Once the wholesale price contraction makes its way into the consumer price level, then the deflationary impact should exacerbate the slump in copper and the rest of commodities.

Slowest Chinese fixed assets in 11 years

Today’s release of the 17.9% y/y rise in Chinese February fixed asset investments showed the slowest pace since December 2002. Considering China’s vital role in demanding emerging markets’ exports, any additional signs of Chinese weakness should be more ominous to emerging market currencies and debt than the threat of more tapering from the Federal Reserve.

Returning to copper’s leading role in forecasting market declines and economic slumps, these are highlighted in the below chart:

June 1997 peak occurring 4-6 months ahead of the start of the Asian currency crisis;

July 1999 peak occurred 10 months before the Nasdaq 2000 tech top;

May 2007 peak occurred 5 months before equities peaked ahead of global subprime crisis;

February 2011 peak occurred 3 months before the Eurozone debt crisis dragged S&P500 by 22%;

February 2013 peak ???