HEADLINE: Copper’s disastrous quarter?

Copper seems to be having a bumpy ride with most headlines predicting that prices are heading for the worst quarter since 2011 or even 2008. Copper is being hit by a fall in demand due to the fear of a recession globally and problems in supply – some of the biggest copper producing countries are seeing a disruption in operations because of COVID-19.

Photo by Ra Dragon on Unsplash

A Reuter’s story published yesterday did point to a small rise in prices on Tuesday thanks to China indicating an increase in economic activity, but predicted an overall fall in prices.

An article in the Wall Steer Journal notes: “Now, copper for April delivery is down nearly 20% this year as of Tuesday, to $2.24 a pound on the Comex division of the New York Mercantile Exchange—the metal’s worst start to a year going back to 1989, according to Dow Jones Market Data.”

The same story goes on quote some predictions for copper that sound rather grim. “Goldman Sachs analysts revised their three-month price target to $4,900 a metric ton from $5,900, saying lower energy prices and weaker currencies among producer nations will drag on the metal. Citigroup sees copper prices falling to $4,300 a metric ton, while TD Securities said it could fall as low as $4,200,” according to the story.

A story on BNN Bloomberg also backed up this prediction. It is no surprise that there is a correlation between Peru and Chile, the world’s top copper exporters reducing production and the prices of copper taking a hit. The BNN Bloomberg story quotes analyst Andrew Cosgrove: ‘At least 17 per cent of global copper supply is at risk from closures, according to Bloomberg Intelligence analyst Andrew Cosgrove’. 

View from global analysts

The Wall Street Journal quotes Natalie Scott-Gray, senior metals analyst at INTL FCStone. “There will be considerably more pain for copper before a recovery ensues,” she told the paper. She also added, “There is a possibility prices could fall as low as $4,000 a [metric] ton. This is unprecedented for a metal that at year-end was meant to be a star performer this year.”

BNN Bloomberg pointed out why the metal is in double trouble. The miners “are being hit from two sides,” said Daniel Briesemann, an analyst at Commerzbank AG, pointing to unprecedented disruptions to operations and supply chains and concerns about a global recession. Even with China’s back-to-work rate improving dramatically, “there’s still hardly any demand from the rest of the world.”

Copper is also sensitive to other market uncertainties: a rising dollar, a fall in the price of oil and global uncertainty due to recession fears.

In an earlier article, the Financial Times quoted an analyst who spoke to the relationship between a rising dollar and the prices of the copper.

“Around half of copper production costs are tied directly to the US dollar, and it is appreciating against copper-producing currencies despite a major decrease in US interest rates,” said Max Layton, analyst at Citi.

Copper prices: A barometer

Copper is often called a barometer on the world’s economic outlook because of its extensive use in construction and homebuilding.

A report by Casper Burgering at ABN Amro Copper says copper is a vital part of our daily lives. “Given the wide variety of its applications, it is often suggested that the trends in the copper market are a useful leading indicator of the state of the world economy”. The report goes on to nickname the metal – “Doctor Copper”.

“Based on trends in copper demand, conclusions can be drawn concerning the state of the world economy.”

If this is true, obviously the diagnosis is clear: Coronavirus isn’t just battering the prices of copper – it is pulling down the global economy as a whole.

The good news is….

The BNN Bloomberg reports concluding paragraph is interesting: The tumbling prices may provide a buying opportunity for investors. UBS group AG recommends investors buy Americas copper producers as the firm sees one quarter of copper price weakness being “followed by six quarters of strength.” Analyst Andreas Housebroken recommends buying Freeport, Southern Copper Corp. and Grupo Mexico.

Copper in the Headlines, also read:

S&P Global: Copper, coronavirus and a constitutional crisis: Chile’s banks under pressure

Authors quoted in this story:

Mai Nguyen, Yvonne Li, Sebastián Pellejero

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