What is Doctor Copper
The term Doctor Copper is market lingo for the base metal that is reputed to have a Ph.D. in economics because of its ability to predict turning points in the global economy. Because of copper's widespread applications in most sectors of the economy — from homes and factories to electronics and power generation and transmission — demand for copper is often viewed as a reliable leading indicator of economic health. This demand is reflected in the market price of copper. Generally, rising copper prices suggest strong copper demand and, hence, a growing global economy, while declining copper prices may indicate sluggish demand and an imminent economic slowdown.
BREAKING DOWN Doctor Copper
Doctor Copper, who is really a concept rather than a person, is often cited by market and commodity analysts as having a strong ability to assess overall economic well-being through the price of copper because of the metal's wide-ranging application in industrial production and electrical equipment. The percentage of global copper production consumed by each sector is estimated by the Copper Development Association (CDA) to be around 65% electrical and 25% industrial with the last 10% used in transportation and other areas.
This makes copper prices a good leading indicator of the economic cycle. For example, if orders for copper are being canceled or delayed, the price will drop. This can be a leading indicator that economic recession is at hand. Conversely, if orders for copper are rising, the price will go up. This can be a leading indicator that industrial jobs are increasing and the economy remains healthy.
A study by the Dutch bank ABN AMRO published in 2014 examined the correlation between copper prices and a number of measures of global economic activity. The statistical analysis shows a strong correlation between copper prices and world trade, regional GDP growth in China, the U.S. and EU, as well as oil and gold prices.
The Limitations of Doctor Copper
Investors are cautioned that Doctor Copper is not infallible and should not be relied upon as the only indicator of economic health. For example, a temporary shortage of copper may lead to rising prices even as the global economy is slowing down; conversely, a copper glut may cause lower prices despite robust economic growth.
Other factors that can artificially influence the price of copper are things like trade tariffs. In 2018 the United States introduced 25% tariffs on steel imports and 10% tariffs on aluminum imports. While these tariffs have not yet extended to copper, doing so can artificially influence the price of copper. This tax levy would make copper a less reliable indicator of global economic health.