We have long argued that certain companies can serve as a bellwether to the overall economy. Caterpillar remains one of our favorite bellwether companies because they take their cue from the price of copper. But maybe we have this argument backwards. Perhaps a commodity and whether or not it achieves a certain price threshold for a certain period of time based on certain market characteristics serves as a better economic indicator. Let’s return to Caterpillar.
Caterpillar has publicly said that when copper reaches a price threshold of $1.60/lb, mining operations start up again (and it’s (Caterpillar’s backlog, increases). Though Caterpillar buys more steel than it does copper, the copper price becomes the price to watch to determine its performance. Last week, I spent some time in Houston and can safely say that the oil and gas industry relies upon the price of oil as a benchmark to carry out major capital projects (the magic number appears to be about $60/barrel). The real question now for that industry relates to the strength of the current price rise (is it just a summer driving season increase) or a belief that long term prices will continue to increase or at least remain at current levels?
If we could summarize the characteristics necessary to look at both these commodities as industry predictors, we’d say that price stickiness (how long does the price meet minimum thresholds) and price quality (is it demand that is driving the price increase vs. some other reason) serve as the telling factors. In the case of price quality, the some other reason can involve speculation, re-stocking or some other false positive that causes the price to increase in an unsustainable manner.
Copper and oil have long been commodities that traders, economists and other industry pundits have relied upon to make economic predictions. But we’re sure other commodities serve as predictors as well. If your industry follows certain commodities as a gauge of overall economic health, we’d love to hear about it. Drop us a line at lreisman (at) aptiumglobal (dot) com.