The doctor is in the house. Yes, we market old-timers love our catchy nicknames for asset classes, and 'Doctor Copper" is one of my favorites. The good doctor, Cu, is supposed to have predictive powers for the state of the world's economy. When copper prices fall, industrial demand is low and a slowdown is imminent, or so the thinking goes.
Well, that is exactly the situation we are seeing now. The global economy has slowed measurably in the past few months, and Doctor Copper is confirming that move. Copper closed trading Thursday at $2.55 per pound, down more than 10% from its mid-July peak of $2.75 per pound. Copper prices crashed from $3.25 to $2.60 last summer, but this year's move is, in my opinion, more telling for the health of the world's economy.
This isn't some Hunt Brothers-style market maneuvering, there is just a pronounced slowdown in global demand for copper. The copper price meltdown in 2018 was foreshadowed by a sharp increase in global inventories. After falling below 600,000 tonnes at the end of 2017, those inventories rose to nearly 900,000 tonnes in 1Q2018 and the free fall in copper's price was underway.
This year, the copper markets are seeing a less pronounced inventory build, but, according to data in Freeport- McMoRan's most recent investor presentation, those inventories have risen by about 25% in the past three months, and now sit at near 500,000 tonnes. So, that's not a massive overhang, but copper's price is telling us that the incremental demand for those tonnes is receding, and may not occur in the balance of 2019.
You can probably guess the culprit for copper's price decline. Yes, they seem to be blamed for everything these days, but it is indeed China. Official data for June, the most recent available, showed that Chinese copper imports fell an astounding 27.2% for the month and that the decline for the first half was 12%. That's real, and it is really important.
I am running out of ways to try to indicate to investors that China's economy has slowed dramatically in 2019. Trump administration trade hawks like Peter Navarro and Larry Kudlow are surely aware of the decline in China's copper imports, along with slowing car sales, oil imports and underwhelming data from a host of other Chinese macroeconomic indicators.
The trade war is working. I am not a fan of tariffs, but I am also not a fan of losing money.
Freeport is always going to be my first call on the health of copper, and (FCX) stock is good call on the health of the world's industrials. FCX is trading just above $9 per share today, wallowing near a 52-week low after trading above $14 per share as recently as mid-April. On a broader view, FCX shares were trading well into the mid-$30s in August 2014. It has been a torrid market for FCX and other hard commodity names, and I believe that will continue.
So, the good doctor copper is telling us the globe's most important economy (sorry, America Firsters, but it is China) has experienced a massive slowdown in growth. It's probably not too late to short FCX here, and other industries that will be hit hard are iron ore (Vale (VALE) , BHP (BHP) ,) coal (Peabody (BTU) , Arch Coal (ARCH) ) and aluminum (Arconic (ARNC) .) All those stocks have performed poorly in the past six months, but if there is one thing I have learned in the following of industrial stocks for my entire adult life, it is that is never too late to short these names, especially heading into a global recession. So, stay away from hardcore commodity plays, and if you play on the short side, take a look at these names for another leg down as we head into fall trading.
