Stock and commodity prices may signal rebound
Stock markets report every day on individual wild horses in a stampeding herd of companies. Each horse, or company, is scored against itself. Stock and commodity exchanges make money because a lot of people like to gamble on horse races, and because a lot of institutional investors have to put their money on at least one horse in the stampede.
The feature that makes these races interesting for an economist is information. The gamblers want to predict which horses will move faster than the herd. Some of the gamblers are very smart and they can afford to buy good information.
At least in theory the resulting stock prices reveal the balance of opinion among informed investors. That suggests that mining supply leaders could reverse-engineer trends in stock prices to see where the smart money thinks the mining industry is going.
Since mining uses a lot of heavy equipment, an increase in the stock prices of heavy equipment companies usually signals optimism about mining as well as downstream opportunities for the supply sector.
The stocks of major mining equipment suppliers have risen sharply in the last year. Atlas Copco’s share price has been rising since January 2016. Caterpillar has gone from a low of $56.90 on January 5, 2016 to $94.65 as I write this. Volvo has gone from $73 to $108. John Deere bottomed in January at $73 and has risen to $105. Komatsu bottomed in February at JPY1566 and is now at JPY2640. Hitachi seems to have bottomed in July at JPY403 and is now at JPY651. Joy Global has gone from $9 to $28 over the year.
Commodity prices can also be a leading indicator for the supply sector. Certain key commodities can be a signal for mining in general. Where mining goes, mining suppliers should plan to follow.
Historically, “Doctor Copper” has been the metal that predicts the state of the economy best. The economy simply can’t grow without raising copper demand. Building construction consumes 45 per cent of copper production. Electric and electronic products, consumer goods and transportation equipment consume another 47 per cent. Any expected increase in demand should drive the price of copper up. And if investors around the world think that copper prices are going up, the price of copper stocks should also go up. Mining suppliers can check their forecasts for the industry by looking at the price of copper.
Good news. The stock prices of copper miners have been rising throughout 2016. Glencore, for example, has gone from $73.50 in January to $317.70. BHP Billiton and Rio Tinto have been rising since January. Southern Copper Corp. has risen 50 per cent in 2016. Investors are obviously expecting growing demand for copper.
Copper prices are not providing an equally clear signal, however. Copper prices and stock indices went in different directions after 2012. Both the TSX and the New York Stock Exchange were climbing in 2012 and continued well into 2015. Copper prices reached an astonishing height in 2011 then started falling steadily. Faith in the price of copper as a leading indicator collapsed. The decline was so steady and so strong that it would have reached zero in June of 2021 unless something changed. Something did change. In January 2016, the price trend suddenly flattened out. Since September, the copper price has jumped 30 per cent. Dr. Copper may be back.
Or not. Demand is growing but capacity has been growing at least as fast, putting downward pressure on the price. In October, the International Copper Study Group forecast a balanced market, suggesting that prices will not rise a great deal in 2017. Longer-term forecasts, from Wood-Mackenzie for example, indicate a growing shortfall in capacity.
Rising copper prices are not necessary for suppliers to do well: they are just one, often-useful indicator that we may be moving into an economic expansion. Much more important is the long-run increase in world demand and production which will lead to growing demand for supplies of all sorts. The long run decline in grades will also increase input requirements. The signals coming from both stock prices and metal prices suggest suppliers may soon be struggling to keep up. It just might be time to start planning for expansion.