What Dr Copper Says About China

Falling copper points to global pain

The answer to where the global economy is headed may well be found in the piles of trash towering above the brick and tin shacks belonging to Beijing’s army of garbage recyclers.

Another recycler a few blocks from Mr. Li, who would only give his family name, Jiang, was morose as he sat at home, his mobile phone quiet. Also from Henan, he has been in the business for seven years, weathering the 2008 financial crisis even as many others gave up and went home. But now, in a corner of his yard, metres-high piles of insulated copper and aluminum wire sit undisturbed, and he said this week has felt “almost the same” as three years ago. “We don’t recycle copper any more because the price has fallen too much. The price has been down for more than a month, so I’ve stopped,” Mr. Jiang said. “I don’t believe the price will go up. It’s a crisis now.” The price of copper – used in everything from household goods to power grids – is considered a bellwether for measuring global demand and, more broadly, economic health. China is thought to be responsible for some 40 per cent of the world’s total copper demand, so any fall in the need for copper here can be interpreted as an economic slowdown with repercussions for the rest of the world. From an all-time high of $10,150 per tonne in February on the London Metals Exchange, copper prices dropped to a 14-month low this month and are now hovering around $7,340 a tonne. China’s monthly imports of unwrought copper and semi-finished copper products rose 11.8 per cent in September, reaching a 16-month high. But, more ominously, its overall export growth slowed in September and a former vice-minister of commerce has predicted that 2012 could bring China’s first annual trade deficit since 1993.

My view:
Reliable statistics from communist China are notoriously difficult to obtain.

While this presents a problem analyzing what is happening in the Chinese growth machine, anecdotal evidence is mounting that the economy is poised for a dramatic slowdown.

One of the dilemma's of a centralized planned economy is when to apply the accelerator and when to apply the brake.

With loose monetary policy going to extremes in Europe and America, China's main export markets have tried to boost their economies with very limited success.

Now the results of these failed monetary and fiscal policies are acting as a drag on the world's greatest exporting nation that has limited internal demand for their own products.

Net result, China is slowing down.

It will not be the world's economic savior.

Mis-allocation of resources in China will lead to recession.

Consider these charts:

SSEC (Shanghai Composite Index)

Copper futures

Notice how the SSEC anticipated the slowdown ahead of the recent decline in copper futures by 4 or 5 months.

In the meantime, copper inventories continue to balloon as shown below.

I like inverse copper ETFs here.
Cash also looks good given the present market volatility.
Also holding an inverse crude ETF, but that is riskier given the situation in the Middle East.

Doctor Copper seems to be saying that the economy is at the beginning stages of a very bad flu.