Copper is an important global industrial raw material, and its price trend is an important indicator of global manufacturing demand. When manufacturing grew rapidly and demand was strong, copper prices rose. And vice versa. Our study found that after the 2008 financial crisis, the role of copper price vane weakened, the role of liquidity-driven more prominent. The change of copper price driving factors not only influences the analysis of copper market, but also makes the analysis of copper-gold ratio face new situation.

1. Copper prices and manufacturing/industrial copper prices are closely related to major manufacturing countries.

(1) copper price and American manufacturing industry before 2004, copper price and American manufacturing output fit well on the whole, and the trend of change between them is consistent. Since 2004, however, the two trends have diverged significantly, with copper prices rising much faster than US manufacturing.

This divergence is directly related to the shift of American Manufacturing to China and other emerging economies in the process of globalization. 

(2) copper price and Chinese industry after 2002, copper price and Chinese industrial growth trend fit well (better than the correlation between copper price and American manufacturing industry after 2004) . As China's industrial value added continued to grow, copper prices as a whole followed the upward trend, especially in 2008 before the outbreak of the financial crisis, copper prices experienced a surge.

When the financial crisis struck in 2008, copper prices plummeted. In late 2008, the Chinese government launched a large-scale economic stimulus program, the Federal Reserve cut interest rates and launched the first quantitative easing (QE) policy in conjunction with the Treasury's stimulus program, to promote the sino-us economic recovery. The Chinese economy was the first to recover and overheat, with copper prices soaring between 2009 and 2011. The central bank was forced to tighten policy and the economy cooled, with copper prices falling between 2011 and 2013. Between 2014 and 2015, China's PPI plunged into deep deflation and copper prices continued to fall due to the collapse of international oil prices and domestic overcapacity. China implemented supply-side reforms in 2016 to end PPI deflation, and copper prices rose between 2016 and 2017. Between 2018 and 2019, as China's economy continued to slow, copper prices fell. The 2020 outbreak of COVID-19 hit the global economy hard, and copper prices fell. Copper prices surged to an all time high in 2021 as the US, China and other major economies launched massive easing policies to support their economies, creating unprecedented levels of liquidity. As the global economy as a whole has not recovered to pre-outbreak levels, we believe that liquidity has played a greater role in the sharp rise in copper prices, and the logic of copper prices has changed significantly since 2008. It should be noted that important changes are taking place in the structure of the Chinese economy, with the secondary sector of the economy's share of GDP dropping from a record high of 53.2 percent in 2004 to 37.8 percent in 2020, and the tertiary sector of the economy's share rising, the change will reduce the impact of Chinese demand on copper prices. If no other economy fills the gap, the role of demand factors will weaken, and the impact of liquidity on copper prices will become more pronounced.

2. Industrial Copper prices and the money supply

Since the 2008 financial crisis, the impact of money supply and liquidity on copper prices has increased. 

(1) copper price and M2before 2004, copper price and M2 price fit each other well, and the increase of copper price is consistent with the trend of money supply, but after 2004, copper price deviates. During the 2008 financial crisis and the 2020 COVID-19 crisis, the Federal Reserve implemented massive easing to stimulate the economy, M2 growth accelerated, and copper price volatility increased. Since the onset of the crisis, liquidity conditions have deteriorated and most asset prices, including copper, have tended to plummet, with the extreme abundance of liquidity being a significant driver of the copper price surge following the introduction of easy stimulus policies.

Between 1959 and 2020, M2 in the United States grew by an average of 7.06 percent a year; between 2008 and 2020, M2 grew by an average of 7.32 percent a year. The increase in M2 is not significant, and is associated with a sharp decline in the money multiplier. In the context of the development of direct financing, the implementation of the quantitative easing policy of the Federal Reserve and the reduction of the monetary multiplier, M2 growth rate has accelerated slightly, while the liquidity in the money market is extremely abundant, which has pushed up asset prices substantially, copper prices are also fully reflective of this.

In April 2008, the U.S. money multiplier was 9.27; in April 2009, it fell to 4.78; in April 2010, it was 4.24; in April 2011, it was 3.61; in April 2014, it was 2.87; in 2019, it rose to 4.43; and in April 2020, it fell again to 3.52, 2021 was just 3.32.

(2) copper price and China's M22008 post-copper price volatility increased. In response to the effects of the 2008 financial crisis, the Chinese government launched a massive economic stimulus program, m2 continued to grow, much as in the United States. The combination of ample liquidity and a sustained and rapid rise in asset prices, coupled with a counter-cyclical monetary policy that stabilizes and restores the economy, has also pushed asset prices out of line with fundamentals.

Copper price trend is closely related to economic cycle, manufacturing performance and monetary policy implementation. Futures prices and spot prices basically the same trend, 1998-20212021 COMEX contracts, 1996-20212021 main line contracts are shown below.

It is important to note that the yuan denominated price of copper in 2021 was still below its all time high in May 2006, which is related to exchange rate movements. In May 2006, the exchange rate was about 8 yuan to the dollar, up from about 6.4 yuan in 2021. (3) copper price and liquidity since 2008 after the 2008 crisis, copper prices have plunged 68.5 per cent, from a peak of $8,818 a tonne on April 9 of that year to $2,776 on December 24. Copper prices surged between 2009 and 2011, reaching $9,800 a tonne at the end of 2010, as major economies such as the United States continued to ease policy to stimulate the economy and major central banks such as the Federal Reserve pumped out liquidity, the record high of $10,095 a tonne was reached in early February 2011, before the US output gap was fixed. Affected by the COVID-19 epidemic, the liquidity of the global financial markets was extremely tight in March 2020, the economic operation was forced to interrupt, the demand contracted sharply, the stock market, precious metals, crude oil and other assets plummeted, copper prices fell to $4,630 a tonne on March 23 from a peak of $6,334 a tonne on January 14. As countries launched large-scale fiscal and monetary stimulus programs, liquidity surged, and as the epidemic gradually got under control and the economy began to recover, asset prices quickly rebounded and skyrocketed, copper hit an all time high of $10,498 a tonne on 2021, more than double its March 2020 low of 126.7% . This shows that the main central bank to implement super-loose counter-cyclical monetary policy on copper prices played a significant role in the fuel, copper price logic has changed significantly. Note: There are differences between M2 statistics in the United States and M2 statistics in China.

3. The trend and logic of copper price by analyzing the trend of copper price in the past 62 years, we have found that the influencing factors and driving logic of copper price have changed greatly before and after the 2008 financial crisis. The following is a further analysis of the logic of copper price, considering the trend of copper price in the past 62 years, macroeconomic changes in major economies and the implementation of monetary policies by major central banks. (1) review of copper prices before 1965, when copper prices were less than $1,000 per ton; between 1965 and 2004, when copper prices fluctuated roughly between $1,000 and $3,000 per ton; and between 2005 and 2008, before the financial crisis, when copper prices rose sharply, exceeding $4,700 per ton in 2005; It peaked at $8,600 a tonne in 2006, with 2008 Football League Cup Final prices fluctuating between $5,000 and $9,000 a tonne before the financial crisis, before plunging from $8,800 a tonne in April before the crisis in 2008 to $2,700 at the end of 2008 Copper prices rebounded in late 2008, when the U.S. and China launched stimulus programs, reaching a then-record high of $10,095 a ton in early February 2011; Between 2011 and 2014, copper prices fluctuated roughly between $6,000 and $9,000 a ton; and between 2015 and 2019, copper is roughly in the $4,000-$7,000-ton range; 2021 has been a slump-rally, with prices in the $4,000-10,000 range.

Reviewing the trend of copper price in recent 62 years, we can find that the fluctuation of copper price has obviously increased since 2008. (2) changes in the logic of copper prices the main driving force behind the sustained and rapid rise in copper prices in 2003-2008 was China's rapid economic growth for many years after its accession to the WTO, its leap to become a global manufacturing center (the world's factory) , and the growing demand for copper, meanwhile, the U. S. economy is doing well, pushing up copper prices. In the wake of the financial crisis, copper prices plunged from a high of $8,818 a tonne in early April 2008 to a low of $2,776 a tonne in late December 2008, as major central banks such as the Federal Reserve launched quantitative easing to stimulate the economy (along with fiscal stimulus packages) , copper prices bottomed out, hitting $7,300 a tonne at the end of 2009, almost back to where they were before the financial crisis, rising to $9,800 a tonne at the end of 2010 and rising further to $10,000 a tonne in February 2011. This period, the US output gap has not yet recovered, the European debt crisis is erupting in many European countries, driving copper prices to rebound quickly and hit a new high mainly driven by two factors: First, China's strong stimulus program led to overheated economy, strong demand; Second, the Federal Reserve first quantitative easing (QE) , liquidity is extremely abundant, pushing up U. S. stocks, commodities and other asset prices. China's Central Bank raised interest rates 11 times between January 2010 and July 2011 and adjusted the economy by raising interest rates five times because the economy was overheating and inflation was too high, according to the reserve requirement. Under the tightening policy, the economy began to cool, copper prices also fell. Copper prices fell to $7,100 a tonne in mid-december 2011 after the People's Bank of China, China's Central Bank, announced a cut in November 2011 as the economy slowed markedly and resumed easing. Between November 2011 and July 2012, the People's Bank of China cut interest rates three times, China's economic growth resumed, and the US output gap recovered, with copper prices peaking at $8,700 a tonne in 2012. Since 2013, China's economy has shifted gears, its growth has slowed and its copper prices have fallen. Between 2013 and 21014, the 1014 fluctuated between $6,000 and $8,000 per ton; between 2015 and 2016, it fluctuated between $4,000 and $6,000 per ton; between 2017 and 2018, China's supply-side reforms pushed up commodity prices and the U.S. economy maintained good growth momentum for many years, the recovery in Europe and Japan saw copper prices rise to $5,000-$7,000 a tonne. In 2019, the United States and other major economies showed a slowing trend, China's economic growth continued to slow, copper prices have fallen.

Hit by the COVID-19 epidemic in 2020, copper prices fell below $5,000 a tonne. The United States, China, Japan, Europe and other major economies have launched large-scale stimulus policies, including the Federal Reserve and the United States Treasury Department's policy is the largest. As the outbreak was contained and the economy began to recover, financial markets rebounded quickly and copper prices rose rapidly, peaking at $10,700 a tonne in 2021, a record high. As the global economy has yet to fully recover and the US output gap caused by the impact of the epidemic remains, easing policies and unprecedented liquidity have been the main drivers behind record copper prices. So far, the driving factors of copper price and market logic have changed a lot. (3) the reasons for the change of copper price logic are as follows: (1) there are four reasons for the change of copper price logic. 1) economic restructuring: China's secondary sector of the economy share of GDP has shifted from rising to falling, and the impact of Chinese demand on copper prices has changed accordingly. 2) policy easing and ample liquidity: Since the 2008 financial crisis, the Federal Reserve and the People's Bank of China have implemented the policy of easing and the liquidity is extremely abundant. 3) aggregate demand and aggregate supply imbalances: The world's major economies are experiencing aggregate demand shortfalls due to factors such as population ageing and widening income gaps, and are therefore increasingly relying on the stimulus of accommodative policies to sustain growth. Loose policy in asset prices while making income distribution tends to deteriorate, forming a vicious circle. In the context of increasing easing efforts, copper prices have also continued to climb and record highs. 4) the influence of Financial Market: the Development and listing of copper futures contracts and options contracts provide copper enterprises with powerful tools to manage risks, and at the same time strengthen the financial attribute of copper. Copper price logic changes, the impact of the copper market analysis, copper enterprises, derivatives and other financial instruments traders, analysts need to pay attention to. In the analysis of copper price and other derived indicators or tools (such as copper-gold parity) , also need to pay attention to the impact of copper price logic changes.

4. Copper Price Outlook in addition to macroeconomic cycle and manufacturing development, the main central bank monetary policy and other macro-factors, copper price changes can not be separated from the fundamental changes. (1) copper fundamentals

As you can see from the chart above, copper prices are broadly in line with the balance of supply and demand, but with a time lag. Copper prices rise when demand exceeds supply; copper prices fall when supply exceeds demand. Of course, there are times of divergence, such as the period after the 2008 financial crisis, when copper prices surged on the back of easy policy and were clearly out of kilter with fundamentals. Since the second half of 2020, copper prices have experienced another round of soaring, stimulated by super-loose policy. Therefore, it can be considered that, on the basis of the fundamentals, the role of extremely abundant liquidity on copper prices can not be ignored. (2) base 1896-20212021 copper futures prices and base trends are as follows.

(3) outbreak according to the statista.com , in 20120 the world's recoverable copper reserves were about 869 million tons, with Chile in first place with about 200 million tons, or 23.01 percent of the world's total. Chile's copper reserves, production and exports are among the world's largest, known as the "Copper Kingdom. ".

The number of new cases (per million) of SARS-CoV-2 virus in Chile and other major copper storage countries is shown below. China, Australia and other countries are better than Chile and other major copper storage countries, but the overall epidemic situation tends to be stable.

The total infection rate of SARS-CoV-2 virus in Chile and other major copper storage countries (cases/per million population) is shown below. China, Australia and other countries have lower overall infection rates than the United States, Chile, Poland and other major copper reserves.

The following figure shows the percentage of SARS-CoV-2 vaccinations in Chile and other major copper-storage countries.

The data showed that Chile, the United States, China, Poland and other countries with high vaccination rates, Mexico and other countries are also increasing vaccination rates, which is conducive to economic recovery, increase the supply of copper. (4) outlook for copper prices the current copper market is similar to that of february-march 2011, with copper prices at all-time highs and the economy recovering. The difference is that supply is now expected to recover, while policy was tightened in 2011 after the Chinese economy overheated. As vaccination rates continue to rise, the epidemic is effectively contained and economic activities such as copper mining continue to recover in an all-round way, with a restorative increase in copper supply that will suppress the upward trend in copper prices. In 2021, copper supply exceeded demand by 31,600 tonnes for the first time since April 2020. 2021 saw a recovery in copper mining in Chile to 4.917 million tonnes in March, up 14.3% month on month and down 1.3% year on year.

Although Chile is currently in the winter, the number of new infections is still high, the situation is still more serious, economic recovery and copper mining still face some difficulties. But as vaccination accelerates, the situation is expected to continue to improve, copper supply has more room to resume growth, which will curb further price rises. In addition, copper prices could come under pressure as the economy continues to recover and inflation heats up, and the Fed is likely to discuss tapering its bond buying programme in the third quarter of the 2021, phasing out its easing measures and even tightening monetary policy in the future. But there are also important factors supporting copper prices. On May 20,2021, Codelco, the world's largest copper producer and Chile's state owned copper mine, sent a letter to members of Congress warning that if Congress passed the glacier protection bill to restrict operations at mines near the glacier, 40 per cent of Chile's copper production will be affected. The glacier bill was first introduced in early 2018 and will be reviewed by Chile's parliament in the coming weeks before it goes to a vote. If Chile's Congress votes to pass a glacier protection bill, it would have a major impact on copper supplies and could send prices sharply higher. The U. S. infrastructure plan, if implemented successfully, will also increase copper demand, supporting copper prices. From a technical point of view, copper prices are still in the upward channel, which is also consistent with the cyclical position of economic recovery and prosperity. But it should also be noted that copper prices will be volatile in the second half of 2021 as supply starts to recover.

It is useful to review the trend of copper price after the 2008 financial crisis. Copper prices bottomed out at the end of 2008 and began a rally and rally in the first half of 2009(MACD golden diverge) , reaching a peak in late February 2011, followed by a relatively large shock, and set a downward direction (MACD dead diverge) in September 2011, opening a bear market, until early 2016. Copper prices hit bottom in late March 2020, hit by the COVID-19 epidemic. As the easing moves into action, the MACD then moves into a golden divergence, followed by a bull market rally that sent copper prices soaring to a record high in 2021. As supply recovers, 2021 copper prices may fluctuate in the second half of the year until a medium to long term direction is clear, the direction depends on the combination of vaccine efficacy, supply recovery, the passage of the Chilean Glacier Act, the US infrastructure plan and fed policy. 5. After reviewing the trend of copper price in recent 62 years, the development and cycle transition of major economies, and the implementation of policies of major central banks, we find that the logic of copper price has changed a lot since the 2008 financial crisis, and the influence of liquidity on copper price has increased, copper prices fluctuate more. With the new changes in China's economic structure, structural adjustment, the proportion of the manufacturing sector continued to decline, the impact of Chinese demand on copper prices tends to decline. Changes in the logic of copper prices should be noted. 2021 copper prices are expected to be volatile in the second half of the year, after the copper price trend is facing greater uncertainty. On the one hand, copper prices face a high decline as the economy recovers, supply grows and leading central banks pull back from easing. On the other hand, if Chile, the world's largest copper producer, passes a glacier protection act to limit copper mining near the glacier, U.S. infrastructure plans, if implemented successfully, will support copper prices. Overall, the bullish impact may slightly exceed the negative factors, copper prices are expected to be volatile in the long-term up trend. If these factors change significantly beyond expectations, copper prices will need to be re-evaluated. 

Source: Big Business Information by Loulan Kingdom finance

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