– Amit Nath
As the world braces for a potential pandemic with the latest mutation of the coronavirus (named 2019-nCoV) rapidly spreading across the world, many markets have begun to price-in downside risks. With equities selling-off, bonds yields compressing, copper, often turned to for its predictive powers on the state of the global economy, has been in free-fall for the last two weeks, dropping by more than 10% in that time alone.
Copper Price (US$ cents per pound)
Source: Bloomberg
Before we take a closer look at what’s happening with the copper market, let start with some context around the coronavirus. The latest installment of the pneumonia-like infection, is believed to have originated in a food market in the giant Chinese city of Wuhan, home to 11 million people. Authorities have now suspended public transportation, ride-hailing services and all trains and flights out of the city in an attempt to contain the spread of the virus. In fact, 11 other Chinese cities under similar measures impacting the movement of more than 40 million people right now.
Wuhan is One of the Largest Cities in the World (Population in millions)
Source: Bloomberg
China first reported the coronavirus outbreak on Dec 30, 2019 in Hubei province (Wuhan is the capital), however the news really started gaining traction in the last couple of weeks during the peak travel season ahead of Chinese Lunar New Year (Jan 25th to Feb 3rd), where up to 400 million Chinese travel domestically and internationally (aka “the world’s largest, annual human migration”). Perhaps as the virus incubated in unaware hosts, travel increased across China, a grave situation may have been compounded, and despite China’s efforts to contain the virus, it has spread beyond Chinese borders with ~4,600 confirmed cases world-wide (~4,500 in China) and ~110 reported deaths.
Confirmed Cases Globally (as of January 27, 2020, 10pm EST)
Source: Bloomberg
While the situation is highly concerning globally, the extent of the reported infection levels in China is truly alarming. For those more visually minded, the heat map of China’s provinces (below) versus the rest of the world (above) puts the magnitude of outbreak into context. Given first reports surfaced just over a month ago (Dec 30, 2019), the virus has spread very quickly within regions and is moving broadly across China, with many suggesting the figures are actually underestimated. As the world searches for an effective antiviral, containment is likely to be the best or only strategy at this time.
Confirmed Cases in Mainland China
Source: Bloomberg
With that context, lets revisit copper. China is the most important market for copper demand in the world, its manufacturing industry consumes more copper in a week than the average sized mine produces in a whole year! In fact, China accounts for ~50% of global copper consumption, which is twice the size of the U.S., Europe and Japan combined.
China Accounts for 50% of Global Copper Consumption
Source: International Wrought Copper Council
While Lunar New Year always occurs at this time of year with Chinese manufacturers winding down inventories, idling smelters, etc it is followed by a major copper restocking as factories rapidly come back online, in preparation for the seasonal peak over the summer. The big question this year is when will factories come back online given significant transportation lock-downs and the extent the coronavirus has engulfed the country.
While it is currently unknowable how long the virus will last and how far-reaching it’s effects will be (viruses can die down quickly, government can provide stimulus, etc). The copper market seems to have made its mind up for the moment, and is in the midst of the worst stretch of continual declines in at least 34 years (see first chart in this blog). With panic selling gripping the copper market, one wonders whether “Dr Copper” and his mystical ability to predict turning points in the global economy, is telling us to remain cautious once again.
Amit Nath is a Senior Research Analyst with Montaka Global Investments.
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