The past two weeks have been turbulent (to say the least) due in large part to increasing fears coming out of Asia. Why is China significant for the American investor? Well, many companies have banked on the country for growth in the decades ahead. Thus, slowing growth out of China would deflate the valuations of these companies.
China seems to be slowing down by all conventional measures, and unfortunately it seems the government is hesitant to step in. The slowdown is being driven by severely diminished wage growth, slowing global demand, and the Chinese government tightening its wasteful spending policies.
The majority of Wall Street’s powerhouse banking institutions have already lowered their GDP estimates below the key 7.5% level. More recently, the Asian markets were rocked as fears of a credit crunch made waves. Keeping liquidity in place is key for builders, property investors, and banks.
Copper isn’t doing well
When rates rise drastically, as they did during our own 2008 financial crisis, a chain reaction occurs which messes with all aspects of the economy. Rates hit an all-time intra-day high of 30% before pulling back to roughly 11%. This brings me to Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), an industry-leading producer of copper, gold, and gas. Shares of the company have tumbled amidst a slew of headwinds, including falling copper prices.
The iPath DJ-UBS Copper SubindexETN is an exchange traded note designed to follow the price movements in direct correlation with physical copper prices. As you can see, both Freeport and Copper have experienced high correlation over a great period of time.
Just last week, copper extended to a 3-year low. Demand from China accounts for around 40% of global copper consumption, thus a demand slowdown could create a huge copper surplus. Some analysts have predicted prices will fall an additional 10% before finding support. In a recent Bloomberg report, analyst Ross Strachan, economist at Capital Economics, stated
Looking at fundamentals it would suggest that there is further downside for copper. We expect prices to fall below $6,000 a tonne next year due to additional mine supply and the weak state of demand.
Should we begin to see tightening policy, slowing growth, and higher interest rates in China, the industrial demand for copper should fall drastically. At the end of the day, Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) and the copper etn are proxies for the price of copper. You should expect shares to continue to follow copper in its trajectory.