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...but red in near term facturing hub, accounting for around 8% of
national output, according to BMO Capital
Markets.
China’s State Grid, the single-largest buy-
opper prices slumped by 10% in Janu- ey has played out on the LME and the CME. er of copper in the world, has pushed back
Cary, marking the heaviest monthly fall Funds slashed long positions on the US its post-holiday purchase tenders, according
since 2015, in a clear warning sign that Chi- market from 81,511 contracts to 52,224 over to Citi bank.
na’s battle with the coronavirus could be very the second half of January, wiping out the The country’s giant construction sector is
bad news for metals demand. nascent net long position that had been ac- expected to return only slowly from its holi-
Activity in China, the engine room of cumulating since the start of the year and day break as curbs on movement restrict the
global manufacturing, stuttered over much leaving the money men net short to the tune flow of labour.
of 2019 but was expected to recover mo- of 20,198 contracts. Although all the early- The immediate prospect is for an accentu-
mentum this year. Investors’ belief that the year bets on a pick-up in Chinese manu- ation of normal seasonal trends with uninter-
Chinese growth story was back on track facturing growth feeding through to higher rupted metals production hitting a demand
helped LME copper hit an eight-month high metals prices have been taken off the table, vacuum leading to rapid inventory build.
of $US6,343/t on January 16. there has been no significant build in short BMO expects copper producers to re-
That early January optimism had been positions. spond with “aggressive smelter mainte-
blown away by early Feburary, with Dr Cop- So far. nance”, another way of saying output cuts.
per falling every day as the market tracks, The latest Commitments of Traders report The market has gone from talking up Chi-
with increasing trepidation, the spread of the is a rear-view mirror on the market in late na’s demand prospects to speculating about
virus and the draconian measures taken to January, when copper was still in full free- the need for production cuts in the space of a
contain it. fall. Funds may well have turned actively fortnight. Look no further to understand cop-
When copper closed at $US5,567/t (Janu- bearish since then. per’s massive reaction to the coronavirus.
ary 31) it was the lowest since September In the London market speculative money Citi has cut its short-term copper price
last year, but while funds have liquidated flipped from net long to marginal short, at forecast to $US5,300/t on the immediate
long positions they have not yet turned ag- around 2.8% of open interest January 30, hit to demand, although it remains positive
gressively short. according to an assessment by LME broker about a sharp rebound as Beijing provides
That may yet change as the market di- Marex Spectron. more stimulus.
gests the implications of the virus both on the The reaction is entirely logical. Others such as Capital Economics are not
Chinese and global manufacturing sectors. China accounts for around half of global changing their forecasts just yet although the
January’s slump echoed the two price col- copper demand, consuming around a 1mt virus “clearly poses a downside risk to our
lapses of 2015, when the market dropped per month. It is also the world’s biggest im- expectation of a pick-up in demand for in-
13% in January and more than 10% in No- porter with inbound shipments of refined dustrial commodities later this year,” as stat-
vember, both of which were occasioned by copper averaging 290,000t per month last ed in Capital’s Commodities Weekly Wrap
bear attacks in China; most infamously by year. on January 31.
the Shanghai Chaos fund at the start of the Metal markets have long got used to the There is still an underlying analyst view
year. dip in Chinese demand over the Lunar New that the Chinese authorities will do whatever
Chinese speculators were selling the met- Year holidays, knowing that it is followed by is necessary both to contain the virus and to
als demand story as the Chinese economy turbo-charged restocking along the supply offset any hit to economic growth.
transitioned through one of its low-growth chain. The harder the hit to metals demand, the
cycles. The copper price only bottomed out Chinese producers tend to continue oper- bigger the infrastructure stimulus to follow, it
at the start of 2016. ating through the holidays while metal fab- is hoped. But the problem is that the virus is
Fear about the Chinese economy is ricators normally close, meaning an annual still spreading and so is the fear around it.
once again driving the current sell-off but build in inventory before the spring demand In China the fatality count is rising and
this time Chinese speculators are having to recovery. However, this year there is growing more cities are moving toward the same sort
play catch-up as The Shanghai Futures Ex- evidence that the usual seasonal demand of lock-down paralysing Wuhan.
change (ShFE) only resumed post-holiday surge is going to be postponed as ever more And as other countries move to quaran-
trading on February 3. regional governments and companies push tine China, the supply chain implications for
It immediately went limit down before sta- back the post-holiday return to work. industrial metals multiply.
bilising on news of a central bank liquidity Wuhan itself, the city at the heart of the Even if the virus is not yet a global phe-
boost. outbreak and currently under complete nomenon, its impact on growth expectations
In the interim, the movement of fund mon- lock-down, is a significant automotive manu- is rapidly becoming global with Asian coun-
tries likely to be the first to feel the demand
chill now emanating from China.
The slide in copper prices had run out of
steam at the start of February, with the LME
three-month contract holding its ground
around the $US5,600/t level.
It may be no more than a pause for breath.
The virus hasn’t yet peaked. Nor has the
potential for disruption to metals demand.
And until that changes, market fear hasn’t
peaked either.
– Andy Home, Reuters

aUSTRaLIa’S PaYDIRT MaRCH 2020 Page 11