LME Copper reflects the true GDP growth of China

Prices to remain weak for long term

The economic situation in China is a cause of worry for the world at large now and there is proof of the fact that a tepid rate of growth in China would keep the general prices of metals subdued over a long period of time. The price of copper and generally all LME metals prices would remain soft for the long term as China continues to adjust to its new “normal” rate of growth. Our view is that, China’s GDP growth for 2015 would be in the range of 5-6% as opposed to the official figure of 7%. Our conclusion is based on the plotting the growth rate of China against LME copper prices, which is a good indicator of growth.

We have plotted China’s GDP growth against LME Copper price (as can be seen from Exhibit 1) that price of LME copper is a very good indicator of China’s economic growth as they are positively correlated. From the year 2008 onwards barring exceptional situation of 2009 & 2010 (global financial crisis and sharp meltdown in growth) (refer to Exhibit 2), copper prices have moved in a manner to maintain the multiple of 1000x of China’s GDP growth . Conversely, China’s actual GDP growth figure can be derived as (1/1000th )x LME copper. The fact is that China’s GDP growth has scant correlation to crude oil prices from 2010 onwards but LME prices of non ferrous metals like Aluminium and Zinc also move in tandem with copper.