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December 21, 2006

Copper Price Corroborates Manufacturing Slowdown
by Paul Kasriel

The price of copper is sometimes referred to as "Everyman's Economist" because it is highly correlated with the behavior of the manufacturing sector, as illustrated in Chart 1.

Chart 1

Today on the London Metal Exchange (LME), the price of 3-month forward copper finished $110 per tonne lower from Tuesday's close. At $6,530 per tonne, this is the lowest close for 3-month copper since April 20, 2006 (see Chart 2). Although today's relatively sharp price drop is in part related to the settlement of a Chilean miners' strike, copper prices have been in a declining trend since early September. This weakening in copper prices corroborates the slowdown in the pace of U.S. manufacturing activity - it appears as though manufacturing output peaked in August 2006 - and the recession in housing. The decline in the dollar price of copper is all the more indicative of faltering goods-producing activity in the U.S. inasmuch it has occurred at the same time that the foreign exchange value of the dollar has been falling. All else the same, the dollar price of an internationally-traded generic commodity would be expected to rise as the foreign-exchange value of the dollar fell. The fact that the dollar price of copper has declined along with the fall in the dollar implies that the price of copper has declined in terms of other currencies, not just the dollar. This could suggest that manufacturing activity globally is slowing.

Chart 2
LME Copper, Grade A: Closing 3-Month Forward Price
$/Metric Tonne

Paul L. Kasriel, Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675

The information herein is based on sources which The Northern Trust Company believes to be reliable, but we cannot warrant its accuracy or completeness. Such information is subject to change and is not intended to influence your investment decisions.

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