Are record copper prices the result of a supply or a demand shock?

For many unsophisticated investors the question is rather academic. Whether it is supply or demand at play the result is the same: higher prices. Indeed, copper has set a string of price records recently, last week breaking above the $10,000 a tonne mark.

But as investors buy commodities as a proxy to benefit from stronger economic growth in emerging countries, particularly China, the question is important. Indeed, the red metal’s sensitivity to the strength of global economic growth has earned it the nickname Dr Copper – as if it had a PhD in economics.

As prices surge above $10,000 a tonne, many investors believe that Dr Copper is signalling strong economic growth. Investors take the copper rally as a sign that China and the rest of the emerging markets are doing well, so they buy other risky assets. And true, rising prices reflect, at least in part, rising consumption for the metal.

But in reality, Dr Copper is telling the world that supplies are lagging. Even if global economic growth was modest, copper prices would be high, as we saw in late 2009 and early 2010. The production problems were highlighted by Freeport-McMoRan Copper & Gold, the world’s largest listed copper miner, which said last month that output of copper had fallen by almost 5 per cent in 2010.

Xstrata, the Anglo-Swiss mining company that is one of the world’s five top copper producers, highlighted the supply problems on Tuesday, saying that the “development of new copper projects remains challenging due to skilled labour and engineering shortages, more onerous environmental and planning regulatory requirements, community dissent or increased political risk.”

The miner, releasing its annual results, added: “Challenging conditions in the geographies in which a large proportion of new copper projects are located are likely only to exacerbate this trend.”

Investors should take the message home. At $10,000 a tonne, Dr Copper is signalling an imbalance between supply and demand. But the imbalance is due to mining supply struggling to meet global demand for copper, rather than vice versa. For some, it matters little. The result is the same: record prices. But investors should not take a broader message into rising prices. Dr Copper is speaking about its own health, not about the global economy.