Copper a perfect example of the commodity bust
Copper is purported to have a PhD in economics for its ability to explain what's going on the global economy.
If that's the case, the Dr. Copper is sending a dire signal as it continues to carve out 6-year lows include a 0.57% decline today.
Copper has its reputation because it's a critical component in construction and many consumer goods. Demand for the metal rises alongside virtually any global economy.
Why we might not need to worry
Demand is only half the equation. The other side is supply and that's why copper and other commodities may not be signaling trouble.
We're at the end of the commodity super-cycle. It was sparked by demand from China and other emerging markets but the second phase was the tremendous investment in developing new supply.
Oil is a good example because billions of dollars were spent to unlock shale and drive down the costs of extracting other difficult supplies of crude.
In copper, the supply glut was exacerbated by stockpiling in China. A variety of invoicing scams resulted in massive warehousing of the raw material and that was later unwound.
It's a classic cycle where a boom creates overinvestment. You would think investors would have been smarter but cheap rates kept the easy money going longer than it would have plus many of the investments were made based on expectations of prices to remain the same.
A classic boom, a classic bust
So far, the commodity supercycle has been a textbook boom/bust story. What happens now? New supplies are continuing to come on board and there is nothing to do but dump it on the market.
The large investments in commodities are building the infrastructure and setting up the mine. Once it's operational, prices need to fall much lower before operations are halted.
In short, it ends in tears with prices falling much further than anyone expects as producers continue to produce even when they're losing money in the hopes that prices will pick back up. The copper chart targets the 2009 low at $1.26/lb; bet on it falling even lower.
Major copper producer Freeport McMoran says its net costs after credits in 2016 are around $1.15/lb. Below that is when the real pain begins.