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.

 

Several years ago, Goldman Sachs drew some sobering comparisons with the Australian economy’s ability to weather previous droughts. The bank’s researchers noted that in the past 35 years significant droughts tended to strip anywhere between 50-100 basis points from GDP growth. The agricultural sector contributes about 3 per cent to Australia’s total GDP.

In addition, Australia is one of the top mineral producers in the world and has a large resource inventory of most of the world’s key mineral commodities . Minerals are Australia’s largest export. Australia is a leading producer of minerals for the world and produces 19 minerals in significant amounts from nearly 400 operating mines.

Australia has the world’s largest resources of gold, iron ore, lead, nickel, rutile, uranium, zinc and zircon. The nation is the second largest source of bauxite, cobalt, copper, ilmenite, niobium, silver, tantalum and thorium. Australia’s resources of black coal, brown coal, magnesite, tungsten, lithium, manganese ore, rare earths and vanadium are ranked in the top five in the world.

Rail and port maintenance issues sometimes pose a major risk to Australia’s metallurgical coal exports when bad weather and weather-related damage, as well as infrastructural problems, occur. This tends to be more frequent during La Niña events, rather than El Niño events, when heavy rains and flooding affects areas such as Queensland. Whereas, with droughts associated with El Niño, farm income from crops such as cotton and wheat tends to be hard hit. This year, the positive Indian Dipole, combined with a developing El Niño could spell severe problems for Australia’s agricultural industry, for months to come.

It is interesting to note that many universities and public agencies in Australia are encouraging students to look into the fields of Economics and Meteorology, combined, to help solve climate change and environmental issues that affect millions of people there. To learn more about climate change and the mining industry in Australia, please click here

In conclusion, it is too early to say that the weather in Indonesia, Australia or Chile alone will help spawn a recovery in metals prices. This may have to occur, depending on what happens on a macroeconomic scale, with respect to China, their economy and the Trade War. Nevertheless, given the record global heat waves and forest fires, GDP in at least one of these countries will be affected by extreme weather and potential production or transportation difficulties could well occur for some metals, later this year. This would be especially true if El Niño forms in the months ahead.

Australia’s drought

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