Copper, Gold and Silver Price Changes after Quantitative Easing Announcements

Following a post of ZeroHedge ("Spot the Odd One Out") we were curious to see how copper price reacted to the various QE announcements in the last couple of years. The complement the picture we also looked at gold and silver.

Price data we have downlaoded from Wikiposit (front contracts): Copper, Gold and Silver.

According to our count we have five FOMC announcement with QE characteristics:

1. November 25, 2008
2. March 18, 2009
3. November 3, 2010
4. September 13, 2012
5. December 12, 2012

In order to capture the entire price change due to the announcement we have looking at the closing prices at the day before the announcement (t-1) and after the announcement (t+1) and obtained the following results:

Data is here.

Update on Analysis Program

We have now had the pleasure to blog for one full year and would like to recapitulate our most successful posts in the three categories Copper, Chile and General Interest:

Copper
3. Relationship between Copper Price and Copper Production / Consumption
4. Copper Substitution by Aluminium
6. Top Copper Producing Countries
9. Copper Price Forecasting
10. Relationship between Copper and Chilean Peso Series (1 of 3) (2 of 3) (3 of 3)
12. Peak Copper
        Copper Volume Forecasting
        Relative Conductivity of Ag, Al, Au and Cu
        Copper to Aluminium Price Ratio
        Copper Use in Energy Generation
        Relationship between Copper Price Change and S&P 500 Total Return
        Copper Inventories with Producers

Chile:
7. Voter Turnout Chile 1870 to 2012
10. Relationship between Copper and Chilean Peso Series (1 of 3) (2 of 3) (3 of 3)
        Chile's Export Destination and Products
        Chile's Population (2012 Census)

General Interest:
1. World Population, GDP and GDP per Capita Growth 1820-2020
2. GDP per Capita Time Series for Spanish Speaking Countries
5. Peak Lithium
8. GDP Per Capita Time Series 1820-2008 (Western Europe)
11. Luxury Car Ownership per Capita Series (1 of 2) (2 of 2)
        World Population Data 1820-2008
        Earliest National Day Celebration Events

For 2013 we plan to keep the number of monthly posts at two, more or less equally distributed between the three topics of Copper, Chile and General Interest. We are also happy to include topics suggested by our readers (please use comments).

For the more successful posts and where appropriate we will do updates including the data which will have become available in the course of 2013. We will also try to address the questions which remained unanswered from our initial analysis program:

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

Copper Inventories with Producers

For the last two years the off-exchange copper inventory in China has been an important item when evaluating the copper market. While the anecdotal evidence has been strong, it has proven extremely difficult to come up with meaningful hard data. Nevertheless, a number of blogs particularly FT Alphaville have provided significant insight:

• China’s literally ground-breaking copper inventories (August 14, 2012)
• China is being buried alive in copper (April 26, 2012)
• Let’s count the copper with dust on it (May 31, 2011)
• China’s bonded-warehouse copper mystery (December 21, 2010)

We would like to add one additional piece to the puzzle by looking at producers inventory, particularly Codelco, the largest copper producer worldwide. While Codelco is not a publicly listed company, commendably it makes its quarterly reports reports available in the public domain.

We went through the the financial reports and focused on two metrics: inventory and revenues. We understand that inventory is broader than finished products. Nevertheless the ratio between inventory and revenues (inventory expressed in months of production) is very revealing:

The last data point is for the quarter ending on September 30, 2012. We view it to be quite interesting that the two previous episodes with the inventory exceeding 2 months of production were (i) in 2003 with copper prices below USD 2'000 per ton and (ii) in early 2009 with copper prices falling below USD 4'000. At the moment the (relatively) high inventory levels have not resulted in any price reaction.

We would also like to point out to some interesting movement in copper data as jsut published in the FT (Chinese copper data’s warning signal).

Chinese copper data have just taken a worrying turn for the worse. The country’s imports of the red metal tumbled 22 per cent in October to their lowest in more than a year. At the same time, stocks of the metal have risen to a record high: in October alone, inventories at Shanghai exchange and bonded warehouses collectively rose by about 135,000 tonnes, and are now not far off 1m tonnes, most traders believe. Put those two facts together, and the Chinese copper market appears to be flashing a warning signal. Indeed, back-of-the-envelope calculations suggest a month-on-month drop of almost 20 per cent in Chinese apparent copper demand in October.

Chile's Population (2012 Census)

The preliminary results of the 2012 Chilean census were recently covered in an Economist article: "Chile's economic statistics".

“Casengate”, as it has become known, is not the only recent statistical anomaly in Chile. Preliminary findings from this year’s census found only 16.6m Chileans. That was surprising since the projection by the National Statistics Institute (INE) from the previous census in 2002 was 17.4m. The new number seemed to confirm worries that this year’s census was poorly conducted. But it allowed Felipe Larraín, the finance minister, to point out wryly that the country’s income per head, at purchasing power parity, is around $19,000—a handy upward leap from $17,222 last year.

This lead to an response by one of Chile's leading economist, Dr. Klaus Schmidt-Hebbel from the Catholic University of Chile:

Furthermore, the 2012 census showed that Chile’s population fell well below the joint UN and government projection, and not, as you said, only below the projection provided by the National Statistics Institute. You infer that “the new number seems to confirm that this year’s census was poorly conducted.” In other words, you are saying that if reality differs from a projection based on ten-year- old data then reality must be wrong. Nor did you mention that the 2012 census was taken over a three-month period in order to survey a larger proportion of Chile’s population, whereas previous censuses were taken on one day. As a result the 2012 census had the largest coverage in Chilean history: 98.34% of households.

Let's look at the data. The following is an extract from the aforementioned preliminary results, which coincides with the 16.6 million mentioned by the Economist:

Looking at the INE's vital statistics report from 2010, the numbers are as follows (especially note the footnote 1: "the census omission in 1960, 70 y 82 was 4,3%, 6,6% y 1,5%, census 1992 1,1% and for the census 2002 3,8%"). Unfortunately, it is not entirely clear whether the data for the census years is before or after correction for census omission.

The 2010 vital statistics shows a strange anomaly with regard to the population growth which turns negative for the census years and then considerably above trend for the subsequent years (this assumes that omission have been incorporated in the above data set).

Unfortunately, the INE has a third data set, namely it's population projection based in the 2001 census. This looks as follows:

This leads to the following three (four) series of population data, which have been disseminated by the INE.

I started writing this post believing that the the difference between the preliminary census results and the population projection and vital statistics could be pretty much explained by an omission rate in line with the previous census. Now, I'm struggling to understand what is going on.

Demographic projections are pretty stable. In Chile's case it would mean the projection was more than 800'000 higher than the census results (or approximately 5%), almost 100'000 on an annual basis. Of the following possible explanations, I only view the last one as plausible:

• birth's are over-reported by 100'000 birth a year (approx. 150'000 instead of 250'000)
• death are under-reported by 100'000 birth a year (approx. 200'000 instead of 100'000)
• net emigration is 100'000 a year
• census omission rate continues do be in the order of 5%

Relationship between Cooper Price Change and S&P 500 Total Return

Today we would like to address whether any relationship between copper price and stock market returns can be observed. Both are often interpreted as leading indicators of economic health.

For the cooper price data, we have relied as usual on the USGS data (which we expanded back to 1850 also from USGS). For the S&P 500 data we have used Robert Shiller's data (Yale) going back to 1871. For the calculation of total return we took the dividends plus index valuation for any annual period.

Overall the picture is rather disappointing in the sense that there is really no dependency structure between the two variables as can also be seen in the graphic below:

A left tail dependency might be suspected visually (especially the 1931 data point with -37% copper price change and -40% S&P 500 total return), but corresponding statistical tests don't confirm such relationship.

Obviously the hypothesis of the high co-dependency between copper price changers and stock market return dates back to the Great Depression, where there correlation for the time period 1925 to 1935 was 65%.

However, in the recent episode surrounding the Great Recession, this co-dependency was much lower with a correlation coefficient of 31%.

In a future post we will look at monthly time series to better evaluate lagging behavior (for above episodes, it seems that S&P 500 was somehow leading copper price).

Chile's Export Destinations and Products

Based on data from Chile's national costums service and export promotion agency (ProChile), we put together the following table of countries ranked by their exports for the first three quarters (January to September 2012) with the following data points:

• country (only 25 largest export destinations)
• export share (of January to September 2012 total)
• change relative to same period in 2011
• main export product

Some observations:

• the nine largest export market all suffered a decrease in line with the overall decrease of 7.7% (not shown on above table)
• largest export market is China by a wide margin followed by USA and Japan
• significant increases in exports to India, Australia and Switzerland
• significant decreases in exports to Netherlands, Italy, Mexico, Canada, France and Germany
• stable exports to Spain (where a significant decrease might have been expected)

As expected, copper is the principal export product for most markets. The following export categories are exceptions to the rule:

• Services for Peru and Argentina
• Gold for Switzerland
• Fruit for Colombia and Ecuador
• Wine for UK

Copper Use in Energy Generation

Some assorted quotes:

Efficiency

According to Professor Ronnie Belmans, President of the International Electricity Union, “the judicious use of 1 tonne of copper in the energy sector makes it possible to reduce CO2 emissions by 200 tonnes per year on average” (source).

Premium efficiency electric motors (at the 10 horsepower level) contain nearly 10 kilograms of copper, which is roughly 75% more copper than a standard efficiency electric motor (data is per the International Copper Association) (source). 

Transportation:

Conventional automobiles contain 8kg to 33kg of copper, with the electrical distribution system/wiring harness accounting for about half of the copper used.  Hybrid electric cars contain an estimated incremental 33 kg of copper (source).

New high-speed trains with their electric traction engines use from 3 tons to 4 tons of copper, which can be more than double the copper content of traditional electric trains (source: International Copper Study Group).  Additionally, the overhead cables that supply the power to high-speed trains are made of pure copper or a copper alloy. One kilometer of cable uses 10 tons of copper (source)!

Renewable Energy (Solar and Wind)

Electricity generation via wind farms and solar farms  require significantly more copper per megawatt of capacity than conventional electricity generation, with one industry source estimating that wind energy is twelve times as copper-intensive as conventional power generation.  Additionally, solar farms require 4 to 5 times more cable than wind farms of equal power generation (per the General Cable’s 2008 annual report) (Source).

Copper usage intensity, as measured in pounds needed per megawatt of new capacity (lb/MW) is larger in RE (Renewable Energy) plants of all sizes and types, by a factor ranging between two and almost six times, than that seen in conventional fossil- or nuclear-based generation. The multiplier is based on the assumption that conventional/nuclear plants utilize 2,000 to 3,000 lbs Cu/MW, and somewhat less in plants larger than one gigawatt in capacity. A study by the Shaw Consulting Group commissioned by CDA approximately 10 years ago cited significantly higher values for conventional plants, but CDA membership reviewers believed those figures to be excessive, a sentiment that the authors of this support (source).

Solar

Photovoltaic (PV) solar installations fall in the same usage intensity range as land-based wind, ranging from about 5,400 to 15,432 lbs/MW. An ECI study [Nuño, March 2011] reports reasonably similar values. Parabolic mirror-type thermal solar installations are less copper intensive than PV fields because these fluid-based systems are non-electrical and do not require grounding unless fitted with motor-driven tracking devices, in which case, according to the ECI study cited earlier, copper intensity will be 8,800 lbs Cu/MW (source).

Wind:

The approximate intensity of copper use is calculated at 5.64 tonnes/MW of wind powered generating capacity installed onshore (based upon data from 30 planned or operating wind farms) and 9.58 tonnes/MW installed offshore (based upon data from 14 planned or operating wind farms). Analysis of standard decommissioning practice shows that previous estimations of copper availability for recycling may be over-estimated, with 31% of copper used onshore planned to be recycled and 18% offshore. The low copper recovery rates are primarily due to cable decommissioning practices that are justified on the basis of local environmental impact, standard industry practice and technical difficulties in offshore cable recovery (source).

Copper is a key material for generation of renewable energy - the generator in a 5MW wind turbine needs 3.4 tonnes of copper to convert the energy of the wind to electricity (source).

The land-based wind “farms” examined in the study require between 5,600 and 14,900 pounds of copper per megawatt (lb/MW).  Based on British experience, it appears that offshore wind farms may average as much as 21,076 lb/MW installed, including the submarine transmission cables to the onshore grid (source).

Copper is present in all the components of the wind turbine energy production chain, including there generator, the transformer, the rotor and the cables (a wind turbine of 1 MW requires 3.9 tonnes of copper according to the Leonardo ENERGY platform) (source).

Vestas V90-3.0 MW onshore wind turbine is selected as the subject of study because it is one of the mainstream large wind turbines with installations in various regions. The generator weight is given to be 8.5 tons. It is assumed to be composed of 35% copper and 65% steel. The gear system (called as well gearbox) has a total weight of 23 tons. It is assumed to be composed of 98% steel, 1% copper and 1% aluminum. The frame, machinery and shell unit has a given weight of 37 tons. It is assumed to be composed of 85% steel, 8% aluminum, 4% copper and 3% Glass Reinforced Plastic (source).

Infrastructure projects in emerging economies and demand from top global copper consumer China also will continue to fuel usage, according to Langner. A windmill contains about 8 metric tons of copper, with a further 5 to 8 tons needed for power connections, he said (source).

Current generation (a representative current-generation onshore wind turbine is capable of generating 1.5 MW of electricity using conventional technology that includes a three-blade rotor, steel tower, three-stage gearbox, and a wound-rotor type generator): 2'500 kg Cu per MW. Next generation (a representative next-generation wind turbine is capable of generating 3 MW of electricity and could use more composite materials in the rotor blades, steel-concrete towers, and a mixed generator technology assuming 80 percent double-fed induction generator technology and 20 percent permanent magnet technology. The latter could use rare-earth elements): 3'000 kg Cu per MW (source).

Summary of copper use (in tonnes of Cu per MW) estimates in onshore wind turbines:

0.68 (Copper Development Association) ??
2.54 (BBF Associates for Copper Development, low estimate)
2.50 (USGS current generation)
3.00 (USGS next generation)
3.90 (Leonardo Energy Platform for European Copper Institute)
4.69 (School of Architecture and Built Environment)
5.64 (University of Exeter onshore)
6.76 (BBF Associates for Copper Development, lhigh estimate)
9.58 (University of Exeter offshore)

The first data point is probably erroneous (3.40 tonnes Cu per 5 MW = 0.68 tonnes of Cu per MW), but it appears accordingly on the website of the Copper Development Association.

Luxury Car Ownership per Capita (2 of 2)

In our previous post we identified two ways of approximating luxury car ownership per capita, whereof we had covered the first approach:

1. Counting car dealership per brand (which is public domain information and available on the above listed sites)
2. Counting used car offered online for individual national markets (which can be retrieved from used car websites or corresponding aggregators)

We now look at the second method and to do so we based our analysis from the used car aggregator OOYYO. Asian countries are largely missing, so it provides an incomplete answer. Furthermore the assumption of proportionality of used car offers relative to car ownership is certainly only correct as a rough approximation.

Here we go (luxury used cars listed relative to all used car listings):

Results are broadly consistent with Switzerland and Luxembourg leading the table followed by Italy, France and UK. The low ranking of Germany and USA is somewhat surprising.

Some basic validation of the data can be found calculating when putting Italian (Ferrari, Lamborghini and Maserati) and UK (Aston Martin, Bentley, Lotus, Morgan and Rolls Royce) luxury cars into relationship, with such ratio being particularly high in Italy and low in the UK.

Copper Substitution by Aluminium

In previous posts we have looked at the relative conductivity of Copper and Aluminium and at their price ratio time series. Both suggested that copper substitution with aluminium is expected to take place.

It is interesting to hear what major copper and aluminium producers have to say about copper to aluminium substitution.

From BHP Billiton ("copper remains a material of choice", "overall substitution remains small", "substitution has not significantly increased penetration"):

From Hydro ("copper substitution represents major potential", "aluminium has almost replaced copper in automotive precision tubing over last 30 years", "the leading position of copper in buildings has remained unchallenged ... until now"):

This is what DB has to say (presented at an ICSG meeting in April 2012) speaking from a copper industry point of view:

Black Rock's Cathrine Raw believes that substitution has already occurred:

“It’s now been fully substituted on the demand side. We’ve seen high copper prices for the past five years, and so in terms of substituting it for aluminum, all of that has occurred already. So unless there is a significant technological change on the demand side, there isn’t really a demand destruction you would expect if prices do raise.

Reuters echoed a similar narrative in their August 2011 article: "Copper's green appeal shields against substitution".

Bloomberg Businessweek provides a balanced view of opinions in their February 2012 article: "Aluminium over copper for cables helps Rusal, Alcoa", citing both substitution bullish voices (such as Rusal and Alcoa) and substitution bearish opinions (such as the above cited ICSG/DB presentation). However, we disagree with the following paragraph:

Copper is at least 65 percent more effective than aluminum in three key properties: electrical conductivity, thermal conductivity and ductility, according to Deutsche Bank. This implies that copper should cost 1.65 times more than aluminum. When that ratio climbs to 2-to-1, an economic incentive to substitute copper with aluminum arises, according to the bank.

Conductivity is a dimensional property while prices are quoted per weight unit. This means that for a cable of the same size (say 1 km length, 1 cm diameter), the copper cable has indeed a 65% higher conductivity compared to aluminium. However, for a copper cable of the same weight, the conductivity for the aluminium cable is almost twice the value of the copper cable (copper's specific weight is more than three times higher than aluminium's specific weight). This implies that purely from a conductivity perspective the price ratio floor would be 0.5 rather than 1.65, although without any doubt other characteristics play an equally important role (ductability, fire resistancy, oxidation etc), so for the last 60 years the price ratio floor was around one.

Street Authority's Nathan Slaughter states in his July 2012 article "one of the biggest opportunities in commodities since 1997" that

with aluminum rapidly replacing more and more copper every year, I believe prices will converge not by copper falling, but by aluminum rising. And there are several other factors at play that point to the exact same conclusion.

Groven and Partners also shares the opinion in their July 2012 post "a copper caper" that substitution will play a role, but sees convergence of the copper aluminium price ratio through lower copper prices rather than higher aluminium prices.

Our basic idea is that the copper market is vulnerable because of (i) economic shocks from macro headwinds, (ii) substitution effects, (iii) a widespread and misplaced belief in Peak copper and (iii) structural changes in the copper market (financialization effects) that exaggerate demand.

We also share the view Peak Copper is not an issue at the moment (i.e. for the next 10 to 20 years).

Finally Goran Djukanovic indicates in an article ("Aluminium versus copper – substitution on the way") in the April 2012 edition of the International Aluminium Journal (pp. 20-23) that:

There is no firm evidence that copper will be replaced by aluminium and alternative materials to an extent that would significantly influence future demand and result in lower prices. The prices of metals and materials (plastics, composites) that replace copper will also rise in future on increased demand, so limiting the extent of substitution and at the same time risking that these materials, in turn, may eventually be replaced.

Luxury Car Ownership per Capita (1 of 2)

Somewhat lighter programming today: a friend recently asked me whether I knew which country had the highest per capita Ferrari ownership. Off course I didn't know and offered a guess that it might be some of the usual suspects including Hong Kong, Singapore, Qatar, UAE, Luxembourg or Switzerland.

Turns out he didn't know either and there are really no good statistics available. So I became interested (in an admittedly rather irrelevant data point). As a first step I decided to make the exercise a little bit broader and included the following brands:

Ferrari	I	http://www.ferrari.com
Maserati	I	http://www.maserati.com/
Aston Martin	UK	http://www.astonmartin.com/
Lamborghini	I	http://www.lamborghini.com
Bentley	UK / D	http://www.bentleymotors.com/
Lotus	UK	http://www.lotuscars.com/
Rolls Royce	UK / D	http://www.rolls-roycemotorcars.com/
Morgan	UK	http://www.morgan-motor.co.uk/
Fisker	US	http://www.fiskerautomotive.com
Wiesmann	D	http://www.wiesmann.com/
Artega	D	http://www.artega.de
McLaren	UK	http://www.mclarenautomotive.com
Tesla	US	http://www.teslamotors.com/
Bugatti	F / D	http://www.bugatti.com

I appreciate that the list is somewhat random.

The following two approaches provide at least a a relative indication of car ownership per capita.

1. Counting car dealership per brand (which is public domain information and available on the above listed sites)
2. Counting used car offered online for individual national markets (which can be retrieved from used car websites or corresponding aggregators)

This post will focus on the first approach. Plotting the number of luxury car dealerships (per country) against population results in the following (own data compilation).

The car dealership metric is clearly biased towards smaller markets and comparison probably only makes sense for countries of similar population sizes. From smaller to larger population, Monaco, Luxembourg, Qatar, Switzerland, Italy, UK, Germany and USA are at the top of their respective population brackets. Italy, UK and Germany are closely clustered whereby for the first two there is clearly a home market advantage. Singapore, Hong Kong and UAE are in same population bracket as Switzerland but have a much lower number of luxury car dealership (so at least on this one my initial hunch was not confirmed).

For Ferrari the number of dealerships per million population looks as follows (also here eliminating countries with only one dealership to increase the meaningfulness somewhat) with Italy highlighted:

For Aston Martin the number of dealerships per million population looks as follows (also here eliminating countries with only one dealership) with the United Kingdom highlighted:

In one of my next posts, I will look at used car offerings as an an alternative to determine luxury car ownership.

Data can be retrieved here.