Copper prices recently fell to a 16-month-low indicating to some financial analysts that a recession may be on the horizon, as the metal’s use across diverse industries means its price reliably gauges world economic health.
The price of copper plummeted to a 16-month-low on June 23, the Financial Times reported. The business magazine Fortune acknowledged the development on June 24, noting that “[w]hen demand for copper is falling, it can signal the economy is contracting, and that has economists worried about an impending recession. After all, copper has entered a bear market before each of the past four recessions.”
Due to its exceptional ability to conduct heat and electricity, copper is used in the manufacture of a vast array of electrical products. The highly ductile metal is also essential to housing construction for its use in plumbing and wiring. It has more recently become a vital component in the production of electric vehicles (EVs).
The commodity is so crucial across industries that it is often referred to as “Dr. Copper.” Some say the nickname stems from the price’s ability to accurately predict recessions better than economics PhDs, while others posit that copper’s price acts as a Medical Doctor (MD) because it astutely discerns the general health of the global economy. In either case, financial analysts have historically viewed plunges in the metal’s price point as causes for concern.
An economic downturn would slow industrial production and new housing construction. This would in turn reduce demand for copper and cause its price to drop. Copper demand has significantly decreased within China — the world’s top importer of copper — in recent months. The situation is tied to an ongoing drop in industrial output from the nation’s top manufacturing hubs, including Shanghai. Industrial production has slumped in these regions due to Beijing’s decision since the start of the year to enforce Chinese coronavirus lockdowns on major cities for weeks or months at a time to contain a resurgence of the disease nationwide.
Shanghai is considered the beating heart of China’s economy — the second-largest in the world — and therefore a major organ of the global finance body. The metropolis is home to 25 million-plus residents and dozens of manufacturing plants for top multinational companies, including the EV-maker Tesla and the electronics giant Apple. Most of these companies, including Tesla in May, were forced to halt or significantly reduce production at their Shanghai factories for weeks at a time due to the city’s strict lockdown order, which officially lasted from March 28 to June 1. Shanghai’s 65-day lockdown was never fully lifted, however, and remained in place to some degree through at least mid-June, Bloomberg reported.
Shanghai’s latest, and possibly ongoing, lockdown caused production at Tesla’s plant in the city to drop to practically zero in April. Tesla’s lack of output was linked to “problems securing parts for its electric vehicles, according to an internal memo seen by Reuters,” the news agency reported on May 10. Though the report did not specify copper as one of Tesla’s hard-to-secure EV parts, the metal was likely among the deficient materials.
“EVs use up to 10 times as much copper as conventional cars, according to a recent report from the Copper Development Association,” Fortune observed on June 24. “Conventional cars typically use anywhere from 18 to 49 pounds of copper, while the average EV uses 183 pounds, and an EV bus can use up to 814 pounds.”
Copper’s centrality to the manufacture of EVs suggests that Tesla’s recent production failure in China may have served as a harbinger of adverse economic conditions that could lead to a recession in the near future.