What sinking copper and oil prices say about the state of the economy

By Myra P. Saefong

Copper futures have dropped over 20% from their all-time high this year

Commodities have declined in the third quarter, marked by hefty losses in oil and copper, as downbeat economic data from China and the U.S. fuel worries about a slowdown in demand.

That has repercussions for financial markets, with signs of economic stress contributing to overall declines the U.S. and global stock markets on Tuesday.

The demand for oil and copper is "often pointed to as an indication of global growth trends," Louis Navellier founder and chief investment officer of asset manager Navellier & Associates, said in a Tuesday note.

When asked about Tuesday's decline in the commodities sector, Navellier told MarketWatch that a downgrade on copper from Goldman Sachs, as well as weakness in China, Europe, Canada and the U.S., pressured prices.

In the U.S., the Institute for Supply Management's manufacturing index edged up to 47.2% from an eight-month low of 46.8%. Numbers below 50% signal the manufacturing sector is shrinking, so the key barometer of U.S. factories was negative for the fifth straight month.

The index reading was below economists' consensus estimate and "especially disappointing" was the new orders component of the data, Navellier said.

The index of new orders fell 2.8 points to 44.6% in August, the lowest in more than two years, while the production component declined to 44.8% from 45.9% in July, the lowest since the economy was shut down in May 2020 at the height of the pandemic.

"Right now, there's still a lot of uncertainty around the U.S. and Chinese manufacturing data points that are affecting more industrial based commodities, like copper and oil," said John Caruso, senior market strategist at RJO Futures.

Official data on China's manufacturing purchasing managers index released over the weekend showed a decline to 49.1 in August from 49.4 in July, marking a six-month low and a fourth-consecutive month below the 50-point threshold separating expansion from contraction.

Economic weakness can dull demand for energy and industrial commodities, and crude-oil futures for oil touched their lowest level year to date, while U.S. copper prices dropped by nearly 3%.

Commodities overall have seen quite a bit of weakness recently. The S&P GSCI index XX:SPGSCI, the benchmark for commodity market investments, was up by as much as 12.4% this year at its peak in April, but it was up by just 0.2% for the year as of Friday, according to Dow Jones Market Data.

Year to date, the S&P GSCI's industrial metals subindex index XX:SPGSIN was up about 5.3% as of Friday, but down 3.3% quarter to date, while the energy subindex XX:SPGSEN lost 1.2% for the year, down 10.6% quarter to date.

Copper

Goldman Sachs in a note Monday said it expects copper prices to average $10,100 per metric ton in 2025, down from its previous forecast of $15,000.

Goldman analysts said "softer-than-expected China commodity demand, as well as downside risks to China's forward economic outlook, lead us to a more selective, less constructive tactical view of commodities."

The lower forecast follows copper's hefty retreat from record-high prices earlier this year. Copper futures settled at an all-time high of $5.106 per pound on May 21, after reaching a record intraday high of $5.199 on May 20. There are about 2,204 pounds in one metric ton.

"Questions around weakness in the Chinese real-estate market and their economy as a whole continue to dominate the story for copper," Caruso told MarketWatch.

On Comex Tuesday, the most-active December copper (HG00) (HGZ24) contract settled at $4.09 a pound, at the lowest most-active contract prices since mid-August. It lost 2.8% Tuesday, its biggest one-day loss since July 18.

Against that backdrop, shares of the world's big copper producers closed lower Tuesday, with Freeport-McMoRan Inc. (FCX) down 6.6% and BHP Group Ltd. (BHP) losing 5.1%.

Will McDonough, founder of Corestone Capital, believes the market had overreacted to the demand curve for copper, which got a boost from the 2022 U.S. Inflation Reduction Act that promotes clean energy and takes action against climate change. Copper is a key metal in renewable energy generation.

The market overreacted to the demand prospects generated by the Inflation Reduction Act, but has also "for sure overcorrected," said McDonough.

As of Tuesday, copper prices have lost 21.2% from its all-time intraday high.

"The good news is demand for battery metals and green energy solutions is not partisan, and won't be excessively volatile around election season - no matter who is in office, the world is needing more energy sources be it for [artificial intelligence], electric cars...and our grids and our connectivity is not prepared for that," said McDonough.

Given that, "we believe that the price of copper will be significantly higher," he said. "How soon that occurs is harder to predict, but it is inevitable."

Caruso, meanwhile, said questions surrounding the weakness in the Chinese economy will "ultimately subside and when the story is fully written for copper demand."

RJO Futures believes "electrification and power grid modification will be the catalyst going forward, as well as expected supply deficits for the foreseeable future," he said.

Oil

For oil, prices are expected to decline as "seasonal demand wanes in the fall," said Navellier.

That's despite the fact that Libya oil is offline Venezuela cannot keep its electricity on, and Ukraine continues to "obliterate numerous Russian crude-oil refineries," he said.

Global benchmark Brent crude saw its November contract drop 4.9%, or $3.77, to settle at $73.75 a barrel on ICE Futures Europe Tuesday, ending at their lowest since December. Prices have now moved down year to date, losing 4.3% from the end of 2023.

The U.S. oil benchmark, West Texas Intermediate crude lost $3.21, or 4.4%, to settle at $70.34 a barrel on the New York Mercantile Exchange, ending at the lowest since December and is down 1.8% year-to-date.

In order for crude to stabilize and recover, the market will need to see improvement in data from China, said Farid Guindo, founder and chief investment officer of Drill Capital Management.

Sharper interest rate cuts in North America and Europe to boost consumer demand sentiment and an extension of production cuts by major oil producers known as OPEC+, in response to near-term weakness in Asia, would also help oil prices recover, he said.

Brent prices are likely to "stabilize" in the $75 to $80 range "once the economic headwinds are behind us," said Guindo.

Navellier, however, said that while the Middle East "remains a tinder box after the Houthis sunk an oil tanker and Hamas killed six hostages," he sees lower prices for oil ahead.

"Between record crude-oil production in America, plus Guyana ramping up its production with the help of Exxon Mobil (XOM), crude-oil prices are expected to meander lower in the upcoming months as demand ebbs," he said.

And for commodities overall, until the U.S. Federal Reserve cuts interest rates "multiple times, and manufacturing activity perks up globally, commodities prices are expected to remain soft," Navellier said.

-Myra P. Saefong

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

09-04-24 0741ET

Copyright (c) 2024 Dow Jones & Company, Inc.