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[Asia Economy Reporter Minji Lee] Until just a month ago, copper prices were rising relentlessly, but they have now fallen to their lowest level of the year. This has raised concerns that the global economy may contract. Copper, unlike other raw materials such as crude oil or gold, is less influenced by political factors and is widely used across manufacturing sectors including automobiles and construction, making it an indicator for predicting economic trends. However, experts believe that the global economy will not immediately fall into a recession and instead advise actively investing in copper.

◆ Copper Price Decline... Economic Recovery Difficult in Q2 as Well = According to the London Metal Exchange (LME) on the 13th, the spot price of copper fell 3.72% from the previous trading day, closing at $9,018.50 per ton. This is the lowest closing price so far this year. Looking at the trend of copper prices, after a sharp drop due to the COVID-19 pandemic, prices surged strongly on expectations of economic recovery. The increase rate approached 7% by the end of March this year. However, since last month, prices have dropped about 12%, giving back all the gains.

Other non-ferrous metals used broadly in manufacturing showed similar trends. The non-ferrous metals index (LMEX), calculated by the LME based on futures prices of six metals centered on aluminum, copper, and zinc (including lead, nickel, and tin), fell about 14% from 5,209.60 on the 1st of last month to 4,474.50 on the 11th (local time).

The downturn in non-ferrous metals like copper was largely influenced by China's lockdown measures. Copper is an essential raw material used in electric vehicles and electronic products, with China being the largest consumer. While the economic recovery after COVID-19 and expectations of economic stimulus from the Chinese government had driven copper prices up, unexpected actions by the Chinese government pulled copper prices down.

The U.S. Federal Reserve's 'big step' of raising the benchmark interest rate by 0.5 percentage points at once for the first time in 22 years to curb high inflation also fueled recession fears, which was negative for copper. Copper has an inverse correlation with the dollar; when the dollar strengthens due to the big step, the denominator increases, lowering the value of raw materials. Soohyun Kim, a researcher at Daishin Securities, explained, "As tightening policies strengthen, liquidity shrinks and interest rates rise, prompting investors to withdraw funds. The opportunity cost of holding inventory increases, reducing demand for physical stock, and pressure to liquidate futures long positions also rises."

As expectations for continued copper price declines grow stronger, voices warning of a rapid economic downturn are increasing. For example, looking back at the 2008 financial crisis, the copper price crash was a precursor to the crisis. Copper futures prices plummeted more than 61% from June to December 31, 2008. During this period, the collapse of the U.S. housing market led to the bankruptcy of major financial firms including Lehman Brothers, triggering the global financial crisis originating in the U.S. The following year, the U.S. GDP growth rate for Q1 recorded -6.1%, and China’s growth rate fell from the 12% range in Q1 2008 to the 6% range in Q1 2009.

Global investment banks are already expressing concerns that China’s Q2 GDP growth rate will fall below 4% (down from 4.8% in Q1), which could hamper the global economy. Reflecting the negative economic outlook, stock markets continue their relentless decline. The Nasdaq index has plunged more than 21% from April to the 10th of this month.

◆ Short-Term Copper Price Decline... Should Be Used as a Buying Opportunity = However, securities experts emphasize that the decline in copper and other raw material prices should be viewed as a correction phase. It is still too early to talk about the end of economic expansion.

The most notable point is the economic stimulus momentum centered on China in the second half of the year. The Chinese government announced strong stimulus measures at the recent Politburo meeting to achieve a 5.5% economic growth target. According to some foreign media, Chinese President Xi Jinping has instructed to achieve an economic growth rate surpassing that of the U.S. next year, and large-scale infrastructure investments are expected to provide momentum for global economic recovery. Byungjin Hwang, a researcher at NH Investment & Securities, said, "China’s city lockdowns are a short-term concern, but in the long term, China’s strong commitment to economic stimulus will push copper prices, which are below $10,000, upward, so it is appropriate to increase investment weight."

There is also a precedent where China’s large-scale investments were reflected in copper prices and helped drive economic recovery. After the 2008 financial crisis, copper futures prices, which had fallen to the bottom, surged 138% from January to December 2009. This rise was driven by China’s infrastructure investment worth 4 trillion yuan. As China injected funds to boost the halved growth rate caused by the financial crisis, copper prices responded accordingly. In fact, China’s GDP growth rate rose to the 12% range the following year, showing a significant increase compared to the 6% range in the previous year.

Another basis supporting economic expansion is the strong consumption capacity of advanced countries, especially the U.S., the largest consumer. Although the Fed has indicated it will continue big steps in June and July, unless the situation develops extremely, it is unlikely that U.S. consumers’ purchasing power will decline to the point of causing economic collapse. Jinyoung Kim, a researcher at Kiwoom Securities, analyzed, "Unlike past tightening periods, cash liquidity for companies and consumers has become very abundant, and there are no signs of consumption slowing despite higher prices and interest rates. The U.S. housing market is also facing supply shortages relative to demand, so the possibility of a downturn in housing prices is low."

The Research Center at Hanwha Investment & Securities also stated, "It is not yet time to worry about a global economic recession. Excess savings compared to pre-COVID-19 levels support consumption in advanced countries, and reduced inventory burdens lower the possibility of investment and employment contraction. Considering China’s economic rebound, the economic expansion trend is expected to continue in the second half of the year."

This content was produced with the assistance of AI translation services.