Shiny copper reflects dim prospects

In a sign that global economic growth prospects are weakening, the price of copper, one of the leading metals used in industrial production, has been declining in recent months as demand has softened.

So far this year, copper prices have fallen by over 22 per cent on the London Metal Exchange, heading for the first annual drop since 2008. Earlier this week, the price went down by nearly three per cent in futures trading in New York for December.

This coincided with news out of China, the world's largest consumer of copper, that its manufacturing sector has been contracting in the last three months and that the economies of the Asia-Pacific region could be slowing down.

For the most part, Asia-Pacific economies had appeared to be resistant to fiscal and debt troubles that have plagued the United States and Europe over the past two years.

Led by China which is projected to record growth of 9.5 per cent this year, India 7.8 per cent, Indonesia 6.4 per cent, and other East Asian nations at five per cent, the region had become a driver of global recovery.

But in recent months, as consumer confidence in western economies has waned and financial markets have become nervous about Europe's debt crisis, concern about the spillover effects on the Asia-Pacific region has heightened.

These economies are heavily dependent on exports to both the European and American consumer markets, with Europe being China's largest customer.

As European countries are being forced to institute stiff austerity measures to deal with the debt crisis, consumer spending is being squeezed, which must in turn compress demand for imports.

Economic slowdown

This is being felt by Japan, formerly the region's export powerhouse, which has seen its exports crimped by the economic difficulties in its overseas markets, and the strength of the yen.

A slowdown in economic growth in the Asia-Pacific region, if intensified, would weaken the role that the region has played in stimulating global recovery.

Increased exports to the region have been important to the recovery of industrial production in major western economies, including the USA and Germany in particular.

As consumer spending in these countries has been restrained by the recessionary economic conditions, companies have turned to Asian consumers to buy their goods.

The economies of major raw material-exporting countries in Latin America and Africa have also been kept buoyant by the burgeoning demand from China, India, and other industrialising Asian countries.

In previous recessions, developing countries have usually suffered economic shocks from falling demand and prices for their raw material exports, but in this caseChina's strong countercyclical demand has overridden the fall in demand from the US and Europe.

It was primarily China's voracious appetite for industrial metals, for example, that was responsible for the steep rebound in copper, nickel and aluminium prices after the collapse at the end of 2008.

The price of copper had sunk to as low as US$3,000 per metric tonne in December 2008, but by end of 2009 had climbed back to just under US$7,000 per tonne.

Nickel prices went up by nearly 75 per cent and aluminium by 46 per cent over the same period.

With recent data from Europe showing that manufacturing output in the region has fallen for four straight months, the steepest fall since June 2009, and the report that new orders for durable goods in the US have dropped in September and October, markets are upwardly revising the risk of another recession.

This is compounded by the uncertainty in Europe caused by the failure to settle the Eurozone bailout plan to deal with the financial problems in Greece, Italy, Spain, etc.

The lukewarm demand by investors for safe-haven assets such as German government 10-year bonds reflects the increasingly dangerous economic climate.

business@gleanerjm.com