Demand for this precious metal has ground to a halt and it could be a signal of dark times ahead. Here’s why.
Dr. Copper’s recent price action could have some serious implications for what’s ahead for stocks and the economy.
Since mid-January, prices for the metal had fallen just over -12% by Monday. While prices have recovered a bit since then, as of this writing, copper is still down more than -9%.
And Simpler Trading trader specialist Danielle Shay warns that things could continue to get worse for the precious metal.
“Copper is a very China-sensitive commodity,” Shay said. “What we’ve seen over the course of the past two years really is this downward trend that I personally equate largely to the trade war. But of course, what we’ve seen over the course of the last two weeks is the coronavirus.”
Copper has long been considered a barometer for global economic health given its applications in everything from washing machines to electric cars. But over the last month, prices for copper have suffered as the rapidly-spreading coronavirus threatens the global economic outlook.
Activity in China, the hub of global manufacturing, had stuttered over much of 2019, but had been expected to gain momentum back this year. But any optimism has taken a hit in the last few weeks as activity in China has been ground to a halt by the virus outbreak.
The outbreak has been “hitting [copper] even harder because of the uncertainty surrounding it and because of the uncertainty of China’s growth,” Shay said. “If we cannot get the coronavirus contained, and China’s economy cannot get back on tract, this absolutely could end in more of a down spiral.”
China accounts for nearly half of all global copper demand, with the country consuming around one million tonnes of the precious metal every month. The nation is also the world’s biggest importer of copper with inbound shipments averaging 290,000 tonnes per month over the last year.
While the commodity markets had anticipated a dip in copper demand from China due to the Lunar New Year holidays, what usually follows is a period of turbo-charged restocking. But this year, the usual seasonal demand surge has been postponed as regional governments and companies across China push back the post-holiday return to normal operations as China attempts to stop the spread of the deadly virus.
Wuhan, the city at the heart of the outbreak, is currently under complete lock-down. It also happens to be a significant automotive manufacturing hub, accounting for around 8% of all national output, according to BMO Capital Markets. And according to Citi, China’s State Grid—the single biggest buyer of copper in the world—has pushed back its post-holiday purchases of the metal.
As China’s massive manufacturing and construction sectors stall due to the virus, copper could hit a demand vacuum which would lead to a rapid inventory build-up, which would be a bad sign for copper prices.
Citi has cut its short-term forecast for copper to $5,300 per tonne based on the immediate hit to demand. While Capital Economics hasn’t changed its forecast for copper for the year yet, it says the virus “clearly poses a downside risk to our expectation of a pick-up in demand for industrial commodities later this year.”
China is expected to do whatever is necessary to both contain the virus while also offsetting any hit to economic growth caused by the outbreak. And while many believe that the harder the hit to copper demand, the bigger the eventual recovery will be, the problem is that the virus is still spreading and so is the fear around it.
As of Thursday evening, the death toll from the virus has risen to 636 while the number of confirmed cases has climbed to more than 31,000. More cities in China are moving toward the same kind of lock-down that Wuhan is in as the fatality count climbs higher. And as quarantines spread, the supply-chain implications for copper and other industrial metals multiples.
The virus has spread to 26 countries, and while on a global scale the virus hasn’t hit other countries as hard as it has China, its impact to growth expectations has quickly become global with countries in Asia likely to be the first to feel the slowed demand from China.