Source: Wall Street Journal

Copper prices may indicate greater troubles down the road for the world economy. The trouble lies in the gap between the marginal cost of supply and the price at which demand gets destroyed

Copper, which is currently, traded at USD 7,600 a ton, trades at 90 percent of its marginal costs of production. Meanwhile aluminum, which trades at around USD 2,100 a ton is 16 percent below as demand grows nearly twice as fast as copper. Copper supply is much tighter and so prices rise until some consumers are forced to use less. Therefore, China's insatiable appetite for copper has pushed prices up to a point where demand in the industrialized world falls to accommodate it.

Conversely, aluminum inventories are relatively high and china has an abundance of smelting capacity. Little fear of a supply squeeze leaves aluminum prices to languish near the marginal cost of production. If prices fall well below that, high-cost, unprofitable capacity will close, tightening supply.

Investors who fear a China slowdown or euro-zone credit crunch would be better off owning aluminum over copper, as the latter has much further to fall before it hits its marginal cost floor. Bull, however, might prefer copper, as a commodity with constrained supply will do better when demand is growing.