London Metal Exchange (LME) copper tumbled to a three-year low of $5,433 per tonne on Monday.
This was hardly surprising given the turmoil unfolding in the broader financial universe.
“Doctor Copper” is the most financialized of the LME industrial metals, meaning the metal was always going to take a double-whammy hit from simultaneous oil price implosion and global stock market collapse.
What is surprising, though, is copper’s swift recovery. LME three-month metal was this morning trading back above $5,600 per tonne.
Zinc and aluminum also swooned to multi-year lows of $1,913 and $1,644 respectively on Monday, but they too have bounced back with a vengeance. Nickel and lead appear positively sanguine about the broader market disorder.
But then industrial metals such as copper were among the earliest coronavirus casualties. Copper was trading at an eight-month high of $6,343 per tonne in January before news of the outbreak in Wuhan sent it tumbling lower.
Funds then either left the base metals space or positioned themselves on the short side, fearing a derailment of China’s expected manufacturing revival.
This positioning landscape seems to have spared copper from the Monday mayhem in global markets.
So too does the metal’s demand dependence on China’s giant manufacturing sector.
While other markets react to the spread of the virus to countries such as Italy, copper’s focus is on signs of a recovery in China itself.
As fund managers rushed to get out of risky assets on Monday, copper was in part spared because there wasn’t much to de-risk.
Longer-term investment money gave copper and other base metals a wide berth over most of last year, fund managers fearing that the Sino-U.S. trade dispute was compounding a cyclical Chinese manufacturing slowdown.
The money men only started creeping back into copper in the closing days of 2019 as a trade truce broke out and China’s manufacturing activity showed signs of renewed momentum.
Money manager net positioning on the CME’s high-grade copper contract turned net long at the end of December and remained so until the end of January, when news of the coronavirus first started grabbing the headlines.
The tentative bullish bets evaporated in the space of two weeks and net positioning turned back to short.
The collective bear bet was steadily reduced from a net 58,557 contracts on Feb. 16 to 43,147 on March 3.
If fund managers have been de-risking in the copper market, it’s been by closing out short positions rather than selling long positions.
It’s a similar story with most of the other core LME base metals. Speculative short-covering was the dominant theme last week, according to LME broker Marex Spectron. Only zinc was still being hammered by funds trading a bearish narrative.
Zinc’s sharp Monday bounce suggests that funds may have reached short capacity even in this out-of-favor market.
Elsewhere, the pattern has been for a gradual bear retreat. That, together with no obvious fund long positions to be liquidated, is one of the key reasons behind the resilience of base metals prices.
The other is China.
The scale of the coronavirus shock to the world economy has inevitably led to comparisons with the global financial crisis a decade ago.
But “this is not 2008,” according to the BlackRock Investment Institute, which expects a “large and sharp” hit to economic activity but not “an expansion-ending event.”
Copper and other base metal markets would seem to agree.
The LME index of major contracts has fallen 6% this year, which is nothing like the scale of collapse seen in 2008 or even during the price trough of 2015-2016.
While other financial markets are pricing in the spread of the virus and its economic impact, copper appears to be pricing in a recovery of both in China itself.
President Xi Jinping’s visit to Wuhan today seemed intended to send the message the country is now winning the coronavirus war with new cases falling dramatically and temporary hospitals being dismantled.
Travel restrictions are gradually being relaxed and the country’s factories are slowing grinding back into activity.
“From a fundamental perspective, the bottom in demand destruction in industrial metals was likely reached in February,,” according to analysts at JP Morgan.
Moreover, the earlier life normalizes in China, the sooner the expected stimulus package.
“We expect Beijing to go all out to boost growth as soon as the virus dies down, paying lesser attention to financial stability concerns than in the last two years,” write analysts at Citi.
“The commodity-intensive investment sectors should disproportionately benefit,” they add.
The focus on events in China speaks to just how dependent global metal markets are on the country’s demand engine.
This is why copper can seemingly shrug off the spread of manufacturing supply chain disruption to Italy, which is now under coronavirus lockdown.
As JP Morgan points out, even if every copper consumer in Europe and North America were to reduce operating rates by 40% for the next three weeks, the hit on copper demand would be just 140,000 tonnes, or a quarter the expected hit to China over the first quarter.
That’s not to say copper and the other base metals couldn’t tumble further in price.
China’s full economic recovery is going to take time. Citi, for example, expects “economic stagnation” in the first quarter, “some improvement” in the second and a “much stronger” second half prompted by stimulus.
The country’s internal metal dynamics have been massively disrupted and short-term stresses are clear.
Producers have largely managed to keep operating over the last month even while many downstream manufacturers have remained closed. This has led to ballooning inventories of metal and calls for government help.
Physical supply-chain dislocation could yet bite copper if China’s import flows are redirected towards LME warehouses, even if briefly.
Citi analysts think copper could lurch lower to $5,200 over the next couple of months before a China-led recovery picks up steam in the second half of the year.
That’s a relatively benign bear forecast relative to what’s just happened to the oil price and stock markets.
Each of those had its own specific drivers.
China is copper’s driver right now, and the good “Doctor” seems to be hopeful about the country’s recovery prospects.