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An economic slowdown in China following the spread of the new coronavirus, and the potential loss of demand for copper, pulled prices for the industrial metal to its lowest in almost three years. Some analysts say the worst may be yet to come.
“Prices certainly have further to fall, especially if the contagion intensifies,” says Hakan Kaya, senior portfolio manager of the Neuberger Berman Commodity Strategy fund NRBAX, +0.00%. Even if the virus ends up being an economic “nonevent” outside of China, many investors may be looking to reduce risks in their portfolios, he adds.
“My worry is that almost everyone will be simultaneously looking for a catalyst exit, potentially creating all sorts of liquidity spirals and seriously impacting copper,” he says.
Copper has taken a significant hit so far this year. On Monday, copper futures logged a 13th straight session decline, the longest such streak on record, based on data going back to November 1984, according to Dow Jones Market Data. Prices settled that day at $2.507 a pound, the lowest since May 2017. Copper futures HGH20, -1.52% settled at $2.593 a pound on Thursday.
During that roughly two-week streak of losses, copper was down 13%, which John Caruso, senior asset manager at RJO Futures, says was “undoubtedly oversold.” Still, “China is the world’s largest consumer of raw commodities, and with both an economic slowdown and a possible pandemic, traders are having a difficult time gauging true value at the moment.”
Caruso says that China’s economy was showing signs of a slowdown even before the virus, pointing to the latest industrial profit figures. Chinese industrial-company profits dropped by 6.3% year on year in December, following growth of 5.4% in November.
“Clearly, industrial demand for copper has slowed over the past quarter, and with the outbreak of coronavirus, this has simply doubled down on the slide in prices and expected demand forecasts,” says Caruso. “You’ve got widespread panic in China; commerce and industry will undoubtedly be [affected] by the virus—to what extent is still difficult to determine.” Many companies in China have temporarily shuttered operations.
The market is in a “deflationary vortex,” reflecting a likely slowdown in both the Chinese and U.S. economies, and the unknowns of a possible coronavirus pandemic, Caruso says. He added that RJO Futures is not advising clients to buy copper at this time. Instead, the commodity brokerage suggests that shorter-term traders sell rallies closer to the $2.60 to $2.65 price level, when they “signal overbought within [a] bearish trend.”
Rohan Reddy, an analyst at exchange-traded funds provider Global X, believes, however, that copper prices are likely to recover following their recent decline, as demand rebounds on the back of accelerated growth in emerging markets.
The market may see more demand as electric vehicles, which use a “substantial” amount of copper, become more mainstream, and many countries that produce copper, such as Chile, have been “prone to bouts of volatility in copper production,” which may be a “catalyst to rebalance supply and demand,” says Reddy.
He believes the global economy looks to be on a “strong footing.” It’s a volatile market, he says, “but for an investor with a longer-term outlook, there is a compelling case for an entry into the copper market.”
Caruso, meanwhile, warns that a breakdown below $2.40 suggests a retest of multiyear lows of $2 to $1.90 a pound, though copper may still rise as high as $3.15 to $3.30 “if economic and supply/demand fundamentals accelerate the bull case” for the metal. He says he is near-term bearish on copper, and would turn bullish when prices top $2.88.
