But we are in a very different time now compared to 18th Century Cornwall. Oversupply in the commodities market has plagued the sector and driven prices down, and nowhere more visibly than in the global copper market. This week, we will investigate two themes: first, the surplus of commodities and second, the way investors think about commodity prices as a gauge for global growth.
For the past few decades, commodity producers have ramped up capex in what many might call an unsustainable manner.
Since the mid-nineties, global oil and gas extraction investment has increased by 476 per cent and Australian mining capex (which we can use as a proxy for global mining investment) has increased by 277 per cent.
These rates of equipment growth rates are so high, it is not surprising that extraction companies have pumped out as much as they possibly could, partly to pay for the capex and partly to gain greater market share.Competition has been an ongoing saga for Opec oil producers. Earlier this year, rhetoric from Saudi and Iranian energy officials were focused on either increasing or maintaining high levels of output to make sure they were maximizing market share.
Since its recent high of $113 a barrel in summer 2014, a barrel of Brent crude is now $50, a 56 per cent fall in price. The September Opec meeting in Algiers hinted at some coordinated production cuts, which has boosted the price in the past few weeks. But cuts will lift prices only if continued.
Over the same time period (June 2014 to present), the price of copper per metric tonne has fallen 32 per cent. This fall could continue, or at least the price is likely to stay at these suppressed levels since metals analysts expect copper production to remain strong for the rest of the year as most mines are still operating, not having to close due to costs.
Some miners have even reversed their plans to curb capacity. We can understand the inclination of mine and rigs to overproduce
With the fall in the price of oil and commodities as a result of oversupply, we can no longer use price as a signal for demand. While demand for oil has been growing at a 1.5 per cent year on year, that has not been enough consumption to match the production. Therefore tracking oil prices as a signal for global usage and global growth would have been misleading throughout the past few years.
More than oil, the copper price has long been a signal for economists to gauge global growth because of how much the metal is used in technological and infrastructure development. But that only works if the price is truly indicative demand and not overshadowed by supply. Global demand for copper is estimated to be growing around 1 per cent over the previous year, which is not booming, but equally, is not contracting. The big wildcard in commodities markets in recent years – China – has been consuming copper nearly 2 per cent more this year than last.
Plotting the price of copper against a global composite purchasing managers’ index (PMI) shows a loosening correlation. The rise in copper prices between in the mid 2000s did not signal a major acceleration in global growth and now the fall in prices has not coincided with a major global slowdown.
Unfortunately data does not go back to far enough for me to compare Wheal Leisure copper prices, but it is clear now that oversupply is much more dominant a force now in determining commodity prices.
Nandini Ramakrishnan is global market strategist of JP Morgan Asset Management
