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.

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