There’s a massive tug-of-war taking place right now between bulls and bears…and I’m not talking about the stock market here.

This bull-bear debate is happening in the futures market for industrial metals. The outcome of this tug-of-war will have a major impact on the health of the global economy, and of course for stock markets worldwide.

According to a recent article in the Financial Times, “Debate is intense among analysts and investors over whether the commodity supercycle can be sustained.” Industrial or base metals have been one of the best performing asset classes this decade. Copper alone is up about 400% in price just since 2000.

Dr. Copper Correctly Foreshadows Fears of Growth Slowdown

Since 2006, base metals prices have gone into a sharp tailspin and corrected over 30% in the last 18 months. In 2007 alone, base metals declined over 20% even as other commodities were shooting to record highs.

Why such a disconnect? The industrial metals sector is often viewed as a key leading indicator or health in the overall economy.

In fact, it’s been said that: “Dr. Copper” is the most accurate economic forecaster on Wall Street. So the reason for the swoon in base metals has everything to do with fears of a slowdown in global growth.

More recently, base metals prices have firmed up strongly. Copper and aluminum prices are back within striking distance of all-time highs. In fact, industrial metals as a group have rallied over 25% just since December.

A Good Gauge of Growth and Inflation

The bears argue base metal prices are at unsustainably high levels on a historic basis, and don’t reflect the risks of a U.S. led economic slowdown. “It is difficult to envisage another bull market phase when factoring in a material slowdown in the global economy,” according to on analyst quoted in the Financial Times story.

The bulls counter that global infrastructure needs, particularly in emerging markets, should keep base metals in high demand for “years to come.”

According to Morgan Stanley, US$21.7 trillion will be spent on infrastructure in emerging markets alone over the next 10 years. That’s a lot of copper tubing and aluminum siding. Therefore, the bulls say, base metal demand should be insulated or “decoupled from the developed world growth slowdown.”

Another point in favor of the bulls is heightened inflation fears. Headline inflation in the U.S. moved above 4% in 2007, while in China inflation has accelerated to nearly 8%. There has been a high correlation in recent years between rising industrial metals prices and expanding inflation expectations – very similar to the move in precious metals.

Judging from the sluggish way that basic material stocks have been acting lately, I wouldn’t be surprised to see another sharp pullback coming in the industrial metals commodities – there’s just too much near-term uncertainly right now. Longer term however, perhaps after a deeper correction, I believe the bulls have a great point that strong global demand (and shrinking supplies) should trigger another profitable rebound in this sector.

So to keep tabs on the health of the global economy, and for a good gauge of inflation fears, better keep a sharp eye on Dr. Copper, and his base metal buddies in the coming months.

MIKE BURNICK, Senior Editor & Global Markets Analyst

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