We like to follow copper as one of the best leading indicators for a global economic recovery. As such, copper has earned the nickname, “Dr. Copper” for its ability to predict future economic turns based on its price, not unlike a PH.D in economics. This is a bit of a misnomer as most economists that we know and follow have a very limited ability of prognostication. Copper, on the other hand, seems to have econometric models that work.
As we wrote on February 4th, 2009 in a note to clients:
“Second, copper, or as we like to call it Dr. Copper for its economic predictive abilities, is showing price stabilization in the face of negative global economic news.”
Since that time copper has morphed from stabilizing, into a veritable bull market, and is up roughly 40% from our February 4th call out.
Coincident with this increase in copper prices are data points supporting improving fundamentals from The Client (China). Preliminary reports out of China suggest that Chinese copper scrap supply may drop 700,000+ tons this year. The implication of this is that copper imports will have to increase, and perhaps dramatically, to offset the decline in copper scrap. March Chinese copper imports jumped to a record high of 374,957 tons, which could be the beginning of a longer term trend of increased imports from The Client.
Despite these positive fundamental headlines, we don’t recommend chasing the Good Doctor Copper at these levels. Our quantitative models show copper overbought at the $2.16/lb level, with support at $1.58 - $1.81. which is outlined below.
Daryl G. Jones