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.

Copper to Aluminium Price Ratio

First the data in graphical format for 12 months (source: Bloomberg), 20 years (source: Bloomberg terminal) and 110 years (source: USGS Copper and Aluminium).

As of 23 August 2012 the ratio stands at 4.08, which is the maximum which has been achieved since the beginning of the time series in 1900. Since 1950 the Cu/Al price ratio has peaked three times (at 1.75 in 1956, at 2.25 in 1973 and at 1.84 in 1991) and then strongly reversed to a price ratio of almost 1.

Typically the reason for the reversion of Cu/Al price ratio is substitution (of Copper usage by Aluminium). Normally this takes time, but there is no fundamental reason, why this will not happen again over the next few years.

In one of our next posts we will look at substitution.

Relative Conductivity for Ag, Al, Au and Cu

The basic conductivity properties (thermal and elctrical) together with its inverse (resistivity) and respective prices and density have been obtained for Silver, Aluminium, Gold and Copper as follows. Note that prices are shown in USD per kg which results in somewhat unfamiliar values.

This results in the following relative conductivity values (Copper=100%). While on a volume adjusted basis, aluminium has about 60% of the conductivity (value may vary slightly as conductivity measurements are experimental and depend on the alloy type) on a weight adjusted basis, Aluminium has about double the conductivity of Copper. Finally on a price adjusted basis Aluminium's conductivity is more than eight times higher.

The situation for electrical conductivity looks very similar.

May be we read to much into the above but given the significant differential it is somewhat surprising that we are not seeing more substitution of copper by aluminium.

Top Copper Producing Countries

The following provides an overview of the top 10 copper producing countries, both on an absolute basis and on a per capita basis. The data source for the copper mining production data is the British Geological Survey. The data source for the population data is the GGDC/Maddison data set, the 2010 value was obtained extrapolating the 2008/2009 growth rate to 2010. Copper price was determined at USD 7'000 per ton.

Chile followed by Peru, China, United States and Indonesia are the leading copper production countries, no real surprises in the top 10 list.

On a per capita basis, Chile remains the undisputed top producer, the other countries making the top 5 are Zambia, Peru, Mongolia and Australia.

Once Ivanhoe's Oyu Tolgoi mine becomes operational, Mongolia's per capita copper production may become of the same magnitude (altough probably still somewhat lower) as Chile. More information about Oyu Tolgoi from Ivanhoe, the project site and Wikipedia.

Calculation details are here.

GDP per Capita Time Series for Spanish Speaking Countries

Data from GGDC/Maddison, values in 1990 Geary-Khamis dollars.

Comparison of Argentina, Chile, Venezuela and Spain for the 1820 to 2008 period in absolute terms:

• Argentina was the wealthiest of the four countries from 1820 to 1940 (although Chile and Spain equalized Argentina around 1870) to be surpassed by Venezuela in the early 1950's
• Chile suffered an almost 40% drop in GDP per capita as a result of the great depression or more specifically low copper prices as a result of it
• Venezuela didn't have any real per capita growth for the last 60 years (!)
• Spain overtook its former colonies of Chile, Argentina and Venezuela in 1965, 1975 and 1983 respectively, the current crisis in Spain is not yet reflected in the data but the difference seems to be too big to be bridged even by Chile in the near term

The same information depicted as a percentage of average world GDP per capita. Venezuela and Argentina relative decay in GDP per capita since the 1950's are very visible. Chile is back to its historic levels of around 175% of the world average, but after a impressive recovery from 1985 to 1997 has stagnated on a relative basis since then.

Finally the rank in terms of GDP per capita among the Spanish speaking countries / territories. The country which was top ranked in the 19th century was Uruguay. Currently the bottom country is Nicaragua.

Data is here.