Copper: The Crying Canary in the Chinese Coal Mine

Sagami

Unless you're an electrician or an investor who pays very close attention to the non-ferrous metals market, you may not have noticed the beating copper took so far this year. It's been getting killed.

Copper is a critical "leading economic indicator." In fact, this metal is nicknamed "Dr. Copper" because it seems to have a Ph.D. in economics when it comes to predicting economic trends.

Given that China is the world's largest consumer of copper in the world by a wide margin — consuming more copper than all of Europe and the US combined — copper is even more important to divining China's economic future.

What does copper predict for China's economy today? Bad, bad times ahead.

The copper price is down 13% so far this year, but the downdraft really accelerated in the last week, taking copper to a four-year low.

Copper is now selling for less than $7,000 per metric ton and appears, in my opinion, headed even lower.

The trigger for the most recent drop was weak economic news out of China.

  • Chinese exports in February slid 18.1% from a year earlier, compared with expectations of a 5% increase in January. That is, by the way, the biggest one-month drop since 2009 on the heels of the 2008 financial crisis.
  • Chinese copper imports dropped like a rock in February, falling from 536,000 metric tons in January to 380,000 metric tons in February.
  • The first corporate bond default in China's history, Chaori Solar, happened last week.
  • A second Chinese company, electrical equipment maker Baoding Tianwei Baobian Electric, had its bonds suspended from trading after reporting its second-consecutive year of losses.
  • China reported the biggest trade deficit in 2 years.

The Chinese government says its economy will grow by 7.5% in 2014, but these numbers as well as the recent plunge in the price of copper tell me that investors should be worried about the strength of the world's second-largest economy.

Why is Copper So Crucial to China?

Of all the non-ferrous or industrial metals, copper may be the most important when it comes to fueling economic growth.

Copper has several useful properties; it is malleable, ductile (can be drawn into wire), an excellent conductor of heat/electricity, and resistant to corrosion.

Those properties make copper one of the most widely used industrial metals in the world.

Copper is used in construction (electrical wiring, plumbing), electronics (air conditioners, televisions), telecommunications (telephones, cable line), healthcare (X-ray, MRIs), technology (computers, servers), and energy production.

Copper is especially important to emerging markets like China. Those countries need to build factories, office buildings, trains, automobiles and homes.

So, tough times are here -- and more might still be ahead -- for copper and, in turn, for China. For longer-term investors, that means some short-term turbulence.

But for those looking to step aside and let the current situation play out, here's what you can do …

3 Actions for China, Copper Investors

Do I mean that the Chinese stock market is headed for the toilet tomorrow morning? Of course not.

Like everything else in the world ... timing is everything ... but I do think that there are three important takeaways from this data.

  • If are you invested in any industrial metal companies —- such as Alcoa (AA), BHP Billiton (BHP), Rio Tinto (RIO), and Vale SA (VALE) —- I'd suggest you take advantage of the next rally and sell into strength.
  • If you own any Chinese ETFs like the iShares China Large-Cap (FXI) or SPDR S&P China (GXC), don't be surprised if they continue to lose money.
  • This doesn't mean you should avoid Chinese stocks altogether. Quite the opposite: One sector of Chinese stocks is delivering huge profits.

Example #1:

Baidu.com (BIDU), the "Google of China," was at $85 a year ago. It is at $160.59 now.

Example #2:

Ctrip.com (CTRP), the "Expedia of China," was at $20 a year ago. It is at $50 now.

Example #3:

Tencent Holdings (TCEHY), the "Facebook of China," was at $30 a year ago. It is at $72.15 today.

Those are just three examples. All of the above stocks as well as dozens of other Chinese tech companies trade on a U.S. stock exchange. That means they are as easy to buy as Facebook (FB), Yahoo! (YHOO) or Google (GOOG).

The copper canary in the Chinese coalmine is warning us. China isn't growing at the breakneck pace that it used to ... but even at 6% or even 5%, it is growing way, way faster than the U.S. economy.

And buried in that 5% to 6% to 7% growth rate are tremendous opportunities ... if you know where to look.

Best wishes,
Tony Sagami

P.S. Speaking of natural resources, it's time to look beyond China. That's because I've uncovered a company with a gas deposit larger than Australia's GDP. Get the details on this “Dollar Dynamo” in my brand-new video presentation. You can view it free of charge here.


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Posted 03-21-2014 12:54 PM by Tony Sagami
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