Copper prices hit their lowest levels in 13 months last week and entered a bear market, potentially signaling that an economic slowdown is happening around the world. “Dr. Copper,” as it is sometimes referred to by economists and finance experts, is often seen as a leading indicator of future economic trends since it is utilized in a number of different sectors. Copper is used in home construction and consumer products, as well as manufacturing. Weaker economic data out of China and Trade War concerns, plus the stronger U.S. dollar continue to pressure copper prices. Gold prices, too, are down 10% since April, mostly due to the strong U.S. dollar.
For a recent interesting article about copper and the global economy, please click here.
But how can weather, if at all, have an impact on global copper mining and other metals for that matter?
Clearly, mining and metal extraction are less weather-dependent than the growing of crops around the world. However, while a shortage of water for the irrigation of field crops can be dramatic for crop yields, it can also be significant for the generation of hydroelectric power for the mining sector and metal smelting in certain regions of the world. This is particularly true in Chile, Indonesia and Australia; the leading producers and exporters in everything from copper to nickel, coal and dozens of other minerals.
The chart above shows the historical tendency of such metals as copper and nickel rising an average of 7.9% and 13.9%, respectively, during El Niño. Why? At times, El Niño can cause persistent flooding in Chile (the world’s largest copper producing country). Droughts in Indonesia can lead to low water levels affecting nickel and copper exports.
El Niño, Chile and How Copper Production and Inflation Measurements Were Changed Forever
In the early 1970s, an El Niño pattern caused torrential rains to hit Chile. Those rains caused Chile’s Atacama Desert, the driest non-polar region in the world, to turn to mud and the copper could not be transported to Chile’s ports. This resulted in one of the most important weather related bull markets ever in copper prices. The inflationary bias in the early 1970s was exacerbated by the heavy rains that affected the Humboldt Current. This current flows from southern Chile to northern Peru into the Pacific Ocean. The current is responsible for about 35% of the world’s sardines and anchovies.
These fish have many uses and are often dried and crushed for animal feed. The flooding rains in the early 1970s created a global fish crisis, which sent feed stock for animals through the roof. This caused a major rally in soybean meal (a supplemental feed) and resulted in a soaring global market in soybeans, beef and hog prices. Coincidentially, OPEC was influencing the price of crude oil with an oil embargo. At the time, the chief of the Federal Reserve (Arthur Burns), was influential in removing the price of food and energy from the inflation figures. This is how “core inflation was born” which excludes most costs of food and energy today.
AUSTRALIA’S GROWING DROUGHT COULD SHARPLY CURTAIL WHEAT AND COTTON PRODUCTION
SOURCE ABOVE: CNBC
Since the 1860s, the Australian Bureau of Meteorology records show that severe drought has occurred in Australia, on average, once every 18 years. Australia’s most severe “persistent” droughts since record-keeping began, were:
– The Federation drought of 1902, in which Australia’s sheep population halved
– The World War II drought of 1937-47
– The 1965-68 drought, and
– The so-called millennium drought of 2003-2012.
You can use this link to “scroll through all of these major droughts” through 2013.
The current Australian drought could well rival some of these other occurrences.