Wednesday, January 25, 2012

Copper Price Forecasting

Forecasting is notoriously difficult, the same applies to copper prices. We have looked at Cochilco's copper price forecasts since 2004 and tracked the following three prices for each calendar year (all values in cents per pound):

  1. Spot price as of June 30, Y-1 (i.e. spot price on June 30, 2004 is 122 cents/pound)
  2. Forecast by Cochilco made on June 30, Y-1 for the average of Y (i.e. forecast made on June 30, 2004 for average of 2005 is 118 cents per pound)
  3. Actual average spot prices for Y (i.e. the average spot price for 2005 is 167 cents per pound)

The deviation of the forecasts and effective value compared to the spot price at the date of the forecast can be plotted as follows:

The correlation between the two time series is -0.07, indicating no predictive power whatsoever.

Actually we don't want to pick on Cochilco. We choose them because they are most likely least biased of all the forecasters. They also might have some additional data and insight being associated with the largest copper producing country.

Tuesday, January 10, 2012

Analysis Program

According to Investopedia:

"Doctor Copper" - 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.” 

Over the next couple of weeks, we will address the following two fundamental questions:
  • Have copper prices actually been a good indicator of turning points in the global economy? Do do so we will assess historical time series of world GDP (possibly also US, China and Chile), copper production volume and copper price. We will also look at the question whether copper prices are early, concurrent and lagging indicators and address the question whether the relationship (provided we find one) has changed over time.
  • What developments will challenge or strengthen the predictive power of copper prices? We name just a few which we aim to discuss in much more detail:
    • Substitution of copper usage (we have heard about Dean Lumber and Dr. Aluminium)
    • Monetization and off exchange warehouse storage, i.e. dark inventory (for wealth preservation and finance / securitization purposes)
    • Increasing recycling rates (copper doesn't degrade and the copper reservoir is significant)
    • Peak copper (lower production and lower grades) compensated by increased copper usage
    • New uses of copper (antibacterial, renewable energy)
    • More efficient design specifications lowering copper content