The most important economic data point for global mining investors was released this week, verifying copper’s plunge to US$2.94, a nine-month low, from US$3.33 per pound on June 7.
The J.P. Morgan Global Manufacturing PMI Index for June was released this week with a reading of 53. The index is an aggregation of surveys answered by thousands of manufacturing companies across the world regarding current levels of business activity, hiring and new orders, among other factors.
Any reading above 50 indicates growth so the June result highlights continued economic expansion. The problem is the trend. The rate of growth as measured by year over year PMI results is deteriorating and this underscores an increasingly difficult environment for copper and broader resource demand.
The chart below compares the year over year change in the copper price with the annual change in the JP Morgan index. In the past three years, notably during the 12 months after February, 2016, the PMI results have often provided a leading indicator for the copper price.
The rate of annual growth in the PMI measure began falling in February, 2017, and the rate of appreciation for the copper price began weakening shortly thereafter.
Importantly, neither line on the chart is in negative territory. This indicates that both the commodity price and global manufacturing activity are, for now, still growing. The trend, however, is still downward and this in part explains the recent weakness in the copper price.
A recent column by Reuters writer Andy Home also reported that the slowing momentum in the copper price is chasing speculators from their bullish copper bets. The second chart, using data from the Commodity Futures Trading Commission, shows that the net futures positions for speculative investors – contracts representing bullish bets on the copper price minus bearish bets – have declined by more than 35,000 contracts since June 12.
The recent weakness in world manufacturing activity cannot be separated from U.S. Federal Reserve rate hikes and the ongoing contentious discussion on trade tariffs.
Rising U.S. rates and an appreciating U.S. dollar have hit the developing world – where much of the world’s manufacturing occurs and local economies are more reliant on manufacturing for GDP growth – extremely hard. In early June, the Indonesian central bank asked the Fed to slow its monetary stimulus withdrawal amid a sharp decline in the value of emerging market currencies. Proposed U.S. tariffs on Chinese goods have also had a chilling effect on China’s manufacturing activity, foreign trade and asset prices.
The global PMIs are a good way for investors to gauge the trend in broader manufacturing and by extension, the potential change in demand for basic materials. The nominal level of worldwide GDP growth remains healthy, but the trends are now negative thanks to U.S. monetary and trade policy. These trends help explain the recent weakness in copper and metals prices, and investors can expect volatile commodity prices for as long as current policies persist.
Scott Barlow, Globe Investor’s in-house market strategist, writes exclusively for our subscribers at Inside the Market.
JPMorgan Global Manufacturing
PMI Index YoY % chg
S&P/GSCI copper spot
Index YoY % chg
60%
8%
50
6
40
4
30
20
2
10
0
0
-
10
-
2
-
20
-
4
-
30
-
40
-
6
‘13
2014
2015
2016
2017
2018
S&P/GSCI copper
spot index
CFTC net non-commercial futures
position in copper (contracts)
550
80000
500
60000
450
40000
400
20000
0
350
300
-
20000
250
-
40000
200
-
60000
2015
2016
2017
2018
THE GLOBE AND MAIL
sOURCE: scott barlow; bloomberg
S&P/GSCI copper spot
Index YoY % chg
JPMorgan Global Manufacturing
PMI Index YoY % chg
60%
8%
50
6
40
4
30
20
2
10
0
0
-
10
-
2
-
20
-
4
-
30
-
40
-
6
‘13
2014
2015
2016
2017
2018
S&P/GSCI copper
spot index
CFTC net non-commercial futures
position in copper (contracts)
550
80000
500
60000
450
40000
400
20000
0
350
300
-
20000
250
-
40000
200
-
60000
2015
2016
2017
2018
THE GLOBE AND MAIL, SOURCE: scott barlow; bloomberg
JPMorgan Global Manufacturing
PMI Index YoY % chg
S&P/GSCI copper spot
Index YoY % chg
60%
8%
50
6
40
4
30
20
2
10
0
0
-
10
-
2
-
20
-
4
-
30
-
40
-
6
‘13
2014
2015
2016
2017
2018
S&P/GSCI copper spot index
CFTC net non-commercial futures
position in copper (contracts)
550
80000
500
60000
450
40000
400
20000
0
350
300
-
20000
250
-
40000
200
-
60000
2015
2016
2017
2018
JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: scott barlow; bloomberg
Scott Barlow