(Repeats Jan. 28 article without changes)
* LME Index and Copper Price: https://tmsnrt.rs/2O5cG8S
* Copper and China Manufacturing: https://tmsnrt.rs/2U4fc2I
By Andy Home
LONDON, Jan 28 (Reuters) - 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% since the first reports of the virus
started dominating the headlines just over a week ago.
Copper has been savaged.
LME copper has slumped 10% from a Jan. 16 high of
$6,343 per tonne to a current $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. The LME
chart picture shows copper "gapping" lower over the weekend, an
increasingly rare phenomenon for a globally-traded commodity.
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.
A NEW YEAR OF RECOVERY...
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 towards 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.
Money managers turned net long of the CME copper contract at
the start of the year and were still long to the tune of 7,269
contracts as of the last Commitments of Traders Report. (COTR)
However, the latest COTR is a snapshot on positioning early
last week before the spread of the virus started spooking global
markets.
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% of
open interest on Dec. 30 to a current 2.5%, according to LME
broker Marex Spectron.
...IS NOW POSTPONED
The shift in positioning points to a collective double-take
on copper's fortunes this year as Chinese authorities lock down
every larger numbers of people to contain the virus.
"Containing the outbreak (via isolation) has a human benefit
and an economic cost," note analysts at Citi bank, adding, "We
believe the market is right to be fearful of the potential scale
of the economic cost at this point in time." ("Metals Weekly",
Jan. 28, 2020).
Calculating that economic cost is still very much work in
progress as ever more Chinese companies and exchanges push back
the post-holiday 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 impact 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." ("Coronavirus highlights fragility of price recovery,"
Jan, 24, 2020).
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 thinks 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".
MORE STIMULUS?
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% this year is,
according to BMO Capital Markets, "likely non-negotiable in
order to meet the doubling of per capita GDP promised by
President Xi in 2020 versus 2010." ("Metals Brief", Jan. 27,
2020)
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.
Beijing may have increasing reservations about using
construction and infrastructure investment to boost broader
economic growth but they are both tried-and-tested channels for
central government stimulus.
MORE VOLATILITY?
It will take weeks, perhaps longer, for a clear picture to
emerge of the economic havoc wreaked by the coronavirus.
In the interim, copper and, to a greater or lesser extent,
the other LME metals are going to remain slaves to the
headlines.
"Any news that patients are responding to medicinal
treatment, news of a vaccine, or that containment is working,
would be bullish catalysts," notes Citi.
Equally, the absence of such positive news but rather a
steadily rising death toll will be clearly bearish.
In the Chinese zodiac the rat is an animal with a reputation
for being intelligent and quick-witted.
Copper players are going to have to be both in the weeks
ahead. They look set to be turbulent times.
(Editing by Mark Heinrich)