Has Copper Bottomed? | The Corona Correction | Refinitiv
Welcome to the Corona Correction Series in association with Refinitiv and your host, Roger Hirst. Copper is considered to be one of the key barometers of the economy because of its wide ranging industrial uses. Indeed copper was one of the first asset prices to start declining early in 2020. But then it consolidated. I spoke to Andy Home, Senior Metals Analyst, to find out what was driving the copper price. Copper is quite an interesting story because if you go back to the start of this year, copper was in pretty sort of bullish spirits. Last year wasn't great for demand, but there were there were high hopes that the Chinese economy was going to turn around, that this was the year that there was going to be a real pickup in sort of industrial activity in China, therefore, the rest of the world. You get about three weeks into January and the first headlines about the Coronavirus outbreak and Wuhan start filtering out into the mainstream News. Copper had a sell off. And the reason it was so quick to react is because China is all important for copper and all the base metals. It accounts for 50% of the world's usage every year. So while other parts of the market were still pretty relaxed about what was going on in China, copper kind of like read some very bearish messages into that and you saw a quick sell off at the end of January and then at the start of February. Part two of this story is, as the Coronavirus start spreading around the world and the news flow starts reflecting that, and you see other markets like the equity markets strating to look very shaky indeed, copper does nothing. Why does copper do nothing, because it is still fixated on the China story. So while the rest of us are getting increasingly concerned about the spread to Italy, whatever, copper is kind of looking still, 'it's gonna be fine in China' look industrial production is going to bounce back, great for like copper demand, they've got it under control. Part three of this story which happened last week, is where copper finally realized, you know what? It's just not just the China story. This is going to be a global story. And the relative calm in the copper market about the global spread was upended last week. Copper was worrying about what was going on in Wuhan, a major automotive center in China. It was worried about sort of dropping car sales in China. Now we look at virtually every automotive manufacturing facility in Europe is closed. Ditto the United States. And what happens next? There is a kink in this story from a copper point of view, but also from all the base metals point of view, because it is a demand disaster. Let's be quite clear about that. But something else interesting is happening on the supply side, because normally what happens under these circumstances is, you know, the miners just carry on producing, they have their own metrics, they're not looking necessarily at the price today or tomorrow. This time, however, the mines are closing. Both South American countries, Peru and Chile, between them, they account for about 20% of global copper production, have started idling the mines or forcing them onto reduced operating. So now we've kind of got an extra complication. We have a demand shock. Copper should go lower and you see that it's being hammered every day. But what if all the world's mines close? What happens then? We could be looking at a complete lockdown of the copper supply chain. Mines closed, smelter's closed and no demand. That's something we've never seen before. So a lot of uncertainty, a lot of volatility, in fairly thin trading, market conditions. Andy picks up on two very interesting points. The first one is how many assets which are focused on the potential for China recovery, are ignoring the global shutdowns taking place in countries that are the end markets for Chinese goods. We can see a similar effect in the China equity market, which has finally fallen below the initial panic lows. The Korean equity market is another which was pricing for a domestic recovery rather than global contagion. The second point Andy makes, is that demand has now collapsed and that is now leading to a shutdown of supply. If governments print money to stimulate demand, whilst keeping supply constrained by not allowing employees to return to work, that could be an unpleasant inflationary shock on its way. We'll see you later with another update.