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The outbreak of the deadly coronavirus in the Chinese city of Wuhan has hit industrial metals hard.

The London Metal Exchange’s (LME) index of base metal prices has plunged 7 per cent since the first reports of the virus started dominating the headlines slightly more than a week ago.

Copper has been savaged.

LME copper has slumped 10 per cent from a Jan. 16 high of US$6,343 a tonne to Tuesday’s closing price of near US$5,715, wiping out all the gains made since the start of December. It is now trading near lows last seen in October.

The slump has been accentuated by the loss of liquidity from Chinese markets, closed for the Lunar New Year holidays.

As ever, Doctor Copper is paying the price of his popularity with the broader investment universe as the risk-off trade courses through global markets.

However, there is also logic in the panic as the copper market collectively reassesses the Chinese industrial recovery story expected in 2020.

The Chinese New Year of the Rat was supposed to herald a rebound in the country’s manufacturing sector, lifting demand across the metallic spectrum.

China’s factory activity had been showing encouraging signs of picking up after months of protracted weakness.

The Caixin purchasing managers index (PMI), which is weighted toward smaller and medium-sized companies, moved into growth-positive territory in August. The official PMI, covering larger companies, followed in November.

Both trends were expected to gather momentum after the Chinese holiday, helped by the Phase 1 trade deal between the United States and China.

The combination of manufacturing recovery and tariffs truce saw funds increasingly buy into the copper story over the course of December.

It’s a fair bet that the build of fund long positions has gone sharply into reverse.

It has certainly been happening in the London market, where speculative long positioning on copper has shrunk from 17 per cent of open interest on Dec. 30 to a current 2.5 per cent, according to LME broker Marex Spectron.

The shift in positioning points to a collective double-take on copper’s fortunes this year as Chinese authorities lock down large numbers of people to contain the virus.

“Containing the outbreak (via isolation) has a human benefit and an economic cost,” note analysts at Citibank, adding, “We believe the market is right to be fearful of the potential scale of the economic cost at this point in time.”

Calculating that economic cost is still very much work in progress as ever more Chinese companies and exchanges push back the postholiday return to work.

Analysts are looking for clues in the history books.

The SARS virus outbreak in 2003, also in China, had a significant but short-lived effect on the country’s economy.

Analysts at Capital Economics note that “back then the Goldman Sachs Commodity Price index initially shed more than a tenth of its value, but this loss was fully recovered a few months after the disease was brought under control in July 2003.”

The difference between then and now is both the size of the Chinese economy, which has grown to dominate metals supply chains, and its recent fragility.

The manufacturing slowdown appeared to be ending.

Citi was expecting a significant rebound in economic activity and metals demand this year predicated on China’s “strong credit impulse over the past 3-6 months.”

But the bank now says that any recovery “has been put on hold for at least the coming month, and for up to 3-4 months.”

Chinese demand, in short, “is expected to remain extremely weak for 4-6 weeks.”

Citi’s view is that Chinese industrial recovery has been postponed, not cancelled.

And others agree.

Capital Economics is not changing its base metals price forecasts for now, arguing “a more convincing rebound in prices will come later this year, as global growth gradually gathers pace.”

There is also the question of how Beijing reacts as the virus causes multiple hits on an already struggling economy.

The government’s growth target of around 6 per cent this year is, according to BMO Nesbitt Burns, “likely non-negotiable in order to meet the doubling of per capita GDP promised by President Xi [Jinping] in 2020 versus 2010.”

If consumption weakens, as seems inevitable over the coming weeks, the Chinese authorities will be tempted to revert to fixed asset investment stimulus to compensate, argues BMO analyst Colin Hamilton.

“As a result, we may see another push into infrastructure projects into mid-year, while property restrictions could be further eased,” he concludes.