Economics as Classical Mechanics: Copper and aluminum

12/27/14

Copper and aluminum

Since 2008, we have been reporting that the evolution of various components of CPI and PPI in the United States is not a random process but rather a predetermined one with long-term sustainable trends [1, 2]. Using these trends, one can predict consumer and producer price indices for various goods, services and commodities. For example, in [3, 4], we presented the evolution many goods and services with varying weights in the CPI. There are more goods, services, and commodities of interest for producers, consumers, and investors. Here we revisit the index for copper ores (the previous revision was two years ago). This is an example showing that some commodity prices are not well predictable.

Figure 1 displays the difference between PPI and the index for copper ores since 1988. This difference has a remarkable history: no big change between 1988 and 2003, and then a sudden surge in the copper index started. The peak was reached in the middle of 2006. It survived before the second quarter of 2008. Then the copper index dropped by almost 300 units back to the PPI level. In 2009, the PPI of copper increased above 500. One may consider these changes as associated with the rise-fall cycles in oil price, but there is no one-to-one correspondence.

We have to admit that there is no sustainable trend in the copper index and the future of the copper ores index cannot be predicted in the long run. Currently, the difference is somewhere in the middle between the previous trough and zero line. Moreover, it has reached the level of the previous local peak in 2007 (see Figure 2 for relative prices). Two years ago we predicted that the PPI of copper might go any direction into 2014, but did not exclude further fall in the PPI of copper relative to the overall PPI. Currently, there is no sign that the PPI of copper is going to change its long-term decline.

On the other hand, aluminium has changed the price evolution dramatically, as Figure 3 shows. We expected the difference to follow the green line into 2016, but this commodity suddenly changed its behavior and the price of aluminum started to grow in 2014. Currently, the price of aluminum follows a linear trend, which is almost a mirror reflection of the expected growth. Same may happen to copper, which is not a well predictable commodity in the long run, but evolve along short linear segments.