Excell with Options: Does Dr. Copper prescribe a move lower on recession fears?
Executive summary
With global economic indicators potentially giving conflicting signals depending on the country, the most economically sensitive commodity – copper – is faced with crosswinds on the path forward. As a result, Copper options volume and open interest has been rising steadily and is at record highs. In this week’s report, Rich examines a ratio call calendar spread for exposure and leverage for a possible move higher in copper.
By most accounts, 2022 has been a very macro year. With so much focus on global growth, supply chains, inflation, politics, and geopolitics, it is difficult to avoid the macro discussion. One can’t have this type of discussion without speaking about copper, often referred to as Dr. Copper because it has a PhD in economics.
If you look at where copper is most used globally, this makes sense. The Copper Development Association (CDA) estimates the amount of copper used in each sector to be around 46% building construction, 21% electrical, and about 16% for transportation with the last 17% used in consumer products and industrial machinery/equipment. Essentially, copper use boils down to housing and the electrification of the global economy.
Source: Copper Development Association. "Annual Data 2021: Copper Supply & Consumption 2000–2020," Page 18.
As a result, copper is one of the leading indicators of the global economy. Copper (Figure 1, in blue) has had a good linkage with the global PMI, leading into the 2020 downturn. While perhaps leading now, it lagged the upturn in 2020 and did not anticipate the V-shaped recovery that came about.
Figure 1: Copper versus Global Copper Users Purchasing Managers Index (PMI)
Copper may do a better job in some countries than others because those countries are much bigger users of copper. For example, looking at the latest data from Statista, China imports about half of all copper imports globally, so as a result copper may be more sensitive to the Chinese economy.
Figure 2: 2020 leading importers of copper
The latest data on the Chinese economy may give some cause for concern for those tracking the Copper market. Looking at the Chinese housing data that came out this week (Figure 3, in purple) we see the weakest numbers this century. In China, the housing market is also a vehicle through which families save for retirement or try to earn extra income to care for family members. With this meaningful slowdown in housing, it is not surprising to see consumer confidence (in orange) also slowing meaningfully. As a result, many are expecting the Chinese leading indicators and Chinese PMI to follow suit. What will this mean for copper demand in the largest importer of copper in the world?