Copper prices are under a freefall mode as global economic activities, especially construction and infrastructure development, which utilises a significant quantity of copper, are taking hit due to the coronavirus or COVID-19 outbreak.
Copper prices are currently trading near the 3-year low witnessed in January 2016 with copper futures (CFD) of the London Metal Exchange trading at USD 4,371.00 (intraday low on 19 March 2020), slightly above its 3-year low of USD 4,317.00 (intraday low on 15 January 2016).
Post showing a decent rally, which took the copper price to USD 6,342.25 (intraday high on 16 January 2020) from USD 5,519.25 (intraday low on 3 September 2019), marking a price appreciation of ~ 14.91 per cent, the metal prices fell substantially to trade at a low of USD 4,371 or down by ~31.0 per cent from its recent high.
Cooper prices are responding in tandem with the arrested global economic growth and many other activities such as manufacturing, industrial production, infrastructure development, which contributes significantly to the cooper demand.
It should not come as a surprise that prices have corrected so ferociously, considering the fact that copper demand is attached at the hip of the global economy.
China Publishes Weak Economic Figures
The industrial production in China plunged with a Y-o-Y change of -13.5 per cent for March 2020, which remained significantly down against the market expectation of a 3 per cent drop and its previous month reading positive Y-o-Y reading of 6.9 per cent.
- The fall in industrial production further complemented apprehended activities of the manufacturing and non-manufacturing sector in China, inferred from the drop in the manufacturing and non-manufacturing monthly data readings.
The manufacturing PMI for February 2020 slipped below the threshold value of 50 to stand at 35.7, which also remained significantly down against the market consensus of 45.1. Likewise, for the same period, the non-manufacturing PMI fell to 29.6, down against the market expectation of 51.4 and its previous above-threshold level of 54.1.
- The fall in industrial production coupled with fall in manufacturing and non-manufacturing activities across China suggested weak economic activities, which in turn, exerted tremendous pressure on copper prices, as China is among the top-most consumer of the base metal.
Apart from that, the investment across the fixed-income assets for March 2020 fell considerably by 24.5 per cent against the previous corresponding period during the first two months of 2020. The fall in fixed-income assets such as power grids, buildings, roads, reflects a negative environment for base metals demand, which in turn, weighing down the prices of base metals such as copper and nickel.
Light at the end of Tunnel Future Hope of Recovery
However, despite negative figures loading-off on base metals, there are some developments across the global front, which could support the overall base metal market in the long-run.
Prominent Central banks such as the United States Federal Reserve, Bank of England, are coming forward to unshackle the halted global economic growth due to the coronavirus outbreak and are implementing many policies to provide the global financial market with more liquidity and credit, needed by households and businesses at the time of economic turmoil.
Likewise, in March 2020, Chinese banks distributed CNY 906 billion new loans to lift the liquidity, which though remained down by 17.63 per cent against the market expectation of 1.10 trillion yuan, and down by 72.87 per cent against the previous distribution of 3.34 trillion in December 2019, includes 300 billion yuan credit for small and medium businesses.
Also, the reduction in credit was not majorly due to the COVID-19 impact, but was more of seasonal in nature, as banks are most likely to front-load during the beginning of the year.
- China Passenger Car Sales to Recover to 1.03 Million Units in March 2020
Many industry experts anticipate that the car sales in China could recover in March to stand at 1.03 million units, up by ~ 59 per cent against the previous month figure of 252,308 units. As per the recently released data from the China Passenger Car Association (or CPCA), the sales of sedans, MPVs and SUVs would stand at 1.03 million, down by 41 per cent against the previous corresponding period, but up against the previous month of February 2020.
High Probability of a Supply Deficit Ahead
While various countries across the globe are locking down their borders to prevent the COVID-19 spread, copper mining and other mining companies are beginning to halt production, delay projects and withdrawing staff, to prevent the further spread, which seems to be a very logical move, as the chances are that the situation could get worse if left unchecked.
In the status quo, Codelco, the behemoth Chilean copper miner, announced on 18 March 2020 that it would reduce its operations to comply with the government declaration of a state of emergency. The Company decided to maintain an operational continuity for 15 days to reduce the number of required workers to comply with the government-imposed restrictions on movement.
Such measures taken by mining companies across the globe could increase the probability of exerting pressure on the supply chain over the medium to long-term, as demand for commodities could recover faster than the supply deficit, in general, though it thoroughly depends upon the reason of the supply deficit.
Weekly Comex Copper Chart
Comex Copper Futures Continuation Weekly Chart (Source: Thomson Reuters)
On the weekly chart, copper is trading well below the Span A of the Ichimoku cloud, which is the mean value of the conversion line and the base line. Copper surged slightly in the past weeks but tested the resistance level offered by the grey cloud and fell back.
The spread between Span A and Span B (mean value of 52-week high and low) is now narrowing down with 14-day RSI near the oversold zone, which suggests that the downtrend is taking a breather. However, the commodity is currently trading below Span A with a negative crossover between the conversion line (mean value of 9-week high and low (sky blue)) and the base line (mean value of 26-week high and low(navy blue)), suggesting that bears are currently dominating the frontier.
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