The economic recovery in the US and the knock-on effects around the world have had a salutary effect on the price of copper over the past couple of years.
Since a five year low of just under US$2 per pound was hit in the early part of 2016, the price has climbed steadily to the point where it reached a high of almost US$3.30 per pound in mid-June of this year.
But in the last week or two there has suddenly been a sharp reversal, as the balance between two competing global economic trends shifts.
Where just a couple of weeks ago, the copper price was being driven relentlessly up by an expectation that a continuing expansion of global economic activity would drive further demand, it’s now being driven down by an expectation that the rising trade war rhetoric between the US and China and the US and Europe will now translate into tangible economic action, and that demand will be hit.
And the copper price itself is down from that near US$3.30 high to a current price of US$2.99 per pound, a drop of just over 9% per cent in the space of a couple of weeks.
There may be a bounce, of course, but for the moment the trend is definitely down, and the read-across from that is that real economic agents, and not just armchair pundits and politicians are now making decisions based on the expectation that a trade war will have a significant impact.
This week, the US rhetoric has mainly been directed against the European car industry, and in particular the German car industry. If US tariffs are thrown up against German cars, and tariffs against American cars rise in return, the impact on copper isn’t hard to predict.
Copper is a significant component of the electronic circuitry in cars, and as the transition towards electric vehicles continues, copper consumption from the automobile industry is only likely to rise.
That of course is one of the major assumptions that has been driving the increase in copper price since 2016. Demand is already apparent to some extent, and major companies have responded in kind.
Early in 2018 BHP Billiton chief executive Andrew MacKenzie laid out his strategy for taking advantage of the newly emerging electric car market, and it didn’t involve lithium or cobalt.
“We have a strong growth plan for copper,” MacKenzie said. “The copper market is an order of magnitude greater, even when you allow for electric vehicles than we would expect the lithium or cobalt market to be.”
Of course, the size of the copper market also means the pain will be less severe if demand does suddenly gets curtailed, but even so BHPBilliton is now comfortably off the three year high it hit earlier in June, when investors were buying solely on the strength of the global economy.
Still, it will be interesting to see how far this downtrend goes. Mr Trump is either lucky or clever or both, in terms of his timing. The time to pick these battles is when the US economy is strong, and can likely weather a few storms, and indeed when the global economy is strong and very possibly able to absorb US demands on tariffs without too much wider damage.
On the other hand, tactically-based threats and individual tariffs may well escalate to a point where neither Mr Trump nor anyone else can control events.
Could history repeat itself? It’s worth remembering that the Asian portion of World War Two was precipitated because the Japanese were shut out of American markets by a tariff wall so high as to be insurmountable.
The parallels with China are not that strong, but they are there. China is a growing military and economic power that is looking to test its strength. If driven towards confrontation, it might relish the opportunity to establish a wider and regional dominance.
And relations between China and the world’s largest economic trading block, the European Union, are currently fairly good, which may end up putting the US on the back foot if confrontation does come.
Mr Trump is playing an interesting, and long game. The effect on markets is hard to predict. Hardly surprising that the VIX volatility index [http://www.cboe.com/vix] has traded consistently higher in 2018 than it did in 2017.