Uh oh, copper has fallen to its lowest price since the financial crisis

A worker handles a roll of copper alloy in a factory in France on Oct. 19, 2001.
A worker handles a roll of copper alloy in a factory in France on Oct. 19, 2001. 

Copper has long been considered a barometer of global economic health. That’s because it's used so widely in the economy, from electrical wiring and electronic appliances to motor vehicle radiators and industrial air conditioning systems. 

Such is the red metal’s perceived ability to gauge the well-being of the economy that some analysts call it "Dr. Copper," because, they joke, it appears to have a PhD in economics.

So people were understandably concerned after the price of copper crashed to a fresh six-year low this week, falling below $4,500 per metric ton on Monday. The plunge of Dr. Copper — and other metals — to the lowest level since the global financial crisis could suggest that another economic recession was imminent. (Really? Who knows.)

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Here's what's driving the collapse.

The main reason was China, or more specifically concerns about falling Chinese demand for the metal, rather than widespread weakness in the global economy.

China’s copper consumption has risen dramatically over the past two decades as its economic growth exploded. China now consumes more copper than any other country on the planet, but a sharp slowdown in its economy — it expanded by 6.9 percent in the third quarter, the slowest pace since 2009 — means it doesn’t need to buy as much of the metal as usual.

And it’s not clear when, or even if, Chinese demand will fully recover. Beijing is trying to restructure the world's second largest economy so that consumer demand and services become the main drivers of growth, rather than investment and manufacturing, which is where a lot of the copper gets gobbled up.

But copper's collapse isn't all about China. It's complicated.

Copper and other metal prices have been steadily declining since 2011 even as the global economy slowly recovered from the financial crisis, prompting some analysts to suggest that Dr. Copper was no longer a reliable indicator of what was happening on the ground and should be "struck off" as a market barometer.

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The Federal Reserve bears much of the responsibility for the rout in prices.

Growing expectations for US interest rates to rise before year-end have fueled investor demand for dollar-denominated assets, which has pushed up the value of the dollar against other currencies.

That has made commodities priced in dollars more expensive for commodity traders using other currencies and, as a result, they’ve been buying less copper, lead, aluminum, nickel and gold.

Weak metal prices are hurting the profit margins and share prices of the companies that dig the stuff out of the ground.

But those companies share part of the blame for prices, too.  

Shares in Anglo-Australian miner BHP Billiton slumped to a 10-year low this week. Other miners have also seen their market value fall sharply.

A logical response would be for them to cut production until demand for copper and other metals picks up again.

Some miners have done just that. Swiss commodity trader and producer Glencore, for example, recently suspended production at two African mines and is also trying to sell assets in Chile and Australia. 

But other miners, like Chile’s Codelco, the world’s biggest copper producer, are playing what one analyst describes as a game of Russian roulette. 

“We’re trying to lower costs to overcome the price drop but we’re not cutting production,” Codelco Chief Executive Nelson Pizarro told a conference in Shanghai earlier this month, Bloomberg reported.

“We would rather cut costs than production. If we suspend production then it’s difficult to restart.”

Much better for Codelco if other miners blink first and cut their output.

Until that happens in a significant way, though, copper prices are likely to stay weak. Even if the global economy doesn't collapse.