(Repeats Monday column with no changes to text)
* The opinions expressed here are those of the author, a columnist for Reuters.
* LME Copper Monthly Change: tmsnrt.rs/2uVu9tE
* CME Copper Fund Positioning: tmsnrt.rs/384GCdf
By Andy Home
LONDON, Feb 3 (Reuters) - Copper prices slumped by 10% in January, marking the heaviest monthly fall since 2015, in a clear warning sign that China’s battle with the coronavirus could be very bad news for metals demand.
Activity in China, the engine-room of global manufacturing, stuttered over much of 2019 but was expected to recover momentum this year. Investors’ belief that the Chinese growth story was back on track helped London Metal Exchange (LME) copper hit an eight-month high of $6,343 per tonne on Jan. 16.
That early-January optimism has been blown away in the last two weeks, with “Doctor Copper” falling every day as the market tracks, with increasing trepidation, the spread of the virus and the draconian measures taken to contain it.
Friday’s close at $5,567 per tonne was the lowest since September last year, but while funds have liquidated long positions they have not yet turned aggressively short.
That may yet change as the market digests the implications of the virus both on the Chinese and global manufacturing sectors.
FUNDS LIQUIDATE BULLISH BETS January’s slump echoed the two price collapses of 2015, when the market dropped 13% in January and more than 10% in November, both of which were occasioned by bear attacks in China - most infamously by the Shanghai Chaos fund at the start of the year.
Chinese speculators were selling the metals demand story as the Chinese economy transitioned through one of its low-growth cycles. The copper price only bottomed out at the start of 2016.
Fear about the Chinese economy is once again driving the current sell-off but this time Chinese speculators are having to play catch-up as The Shanghai Futures Exchange (ShFE) only resumed post-holiday trading on Monday.
It immediately went limit down before stabilising on news of a central bank liquidity boost.
In the interim, the movement of fund money has played out on the LME and the CME.
Funds slashed long positions on the U.S market from 81,511 contracts to 52,224 over the second half of January, wiping out the nascent net long position that had been accumulating since the start of the year and leaving the money men net short to the tune of 20,198 contracts.
Although all the early-year bets on a pick-up in Chinese manufacturing growth feeding through to higher metals prices have been taken off the table, there has been no significant build in short positions.
The latest Commitments of Traders report is a rear-view mirror on the market last Tuesday, when copper was still in full free-fall. Funds may well have turned actively bearish since then.
In the London market speculative money flipped from net long to marginal short, at around 2.8% of open interest last Thursday, according to an assessment by LME broker Marex Spectron.
The reaction is entirely logical.
China accounts for around half of global copper demand, consuming around a million tonnes every month. It is also the world’s biggest importer with inbound shipments of refined copper averaging 290,000 tonnes per month last year.
Metal markets have long got used to the dip in Chinese demand over the Lunar New Year holidays, knowing that it is followed by turbo-charged restocking along the supply chain.
Chinese producers tend to continue operating through the holidays while metal fabricators normally close, meaning an annual build in inventory before the spring demand recovery.
However, this year there is growing evidence that the usual seasonal demand surge is going to be postponed as ever more regional governments and companies push back the post-holiday return to work.
Wuhan itself, the city at the heart of the outbreak and currently under complete lock-down, is a significant automotive manufacturing hub, accounting for around 8% of national output, according to BMO Capital Markets.
China’s State Grid, the single-largest buyer of copper in the world, has pushed back its post-holiday purchase tenders, according to Citi bank.
The country’s giant construction sector is expected to return only slowly from its holiday break as curbs on movement restrict the flow of labour.
The immediate prospect is for an accentuation of normal seasonal trends with uninterrupted metals production hitting a demand vacuum leading to rapid inventory build.
BMO expects copper producers to respond with “aggressive smelter maintenance”, another way of saying output cuts. (“Commodities and the Coronavirus,” Jan. 3, 2020).
The market has gone from talking up China’s demand prospects to speculating about the need for production cuts in the space of a fortnight. Look no further to understand copper’s massive reaction to the coronavirus.
Citi has cut its short-term copper price forecast to $5,300 on the immediate hit to demand, although it remains positive about a sharp rebound as Beijing provides more stimulus. (“Global Commodities Focus”, Feb. 2, 2020)
Others such as Capital Economics are not changing their forecasts just yet although the virus “clearly poses a downside risk to our expectation of a pick-up in demand for industrial commodities later this year.” (“Commodities Weekly Wrap”, Jan. 31, 2020)
There is still an underlying analyst view that the Chinese authorities will do whatever is necessary both to contain the virus and to offset any hit to economic growth.
The harder the hit to metals demand, the bigger the infrastructure stimulus to follow, it is hoped. But the problem is that the virus is still spreading and so is the fear around it.
In China the fatality count is rising and more cities are moving towards the same sort of lock-down paralysing Wuhan.
And as other countries move to quarantine China, the supply-chain implications for industrial metals multiply.
Even if the virus is not yet a global phenomenon, its impact on growth expectations is rapidly becoming global with Asian countries likely to be the first to feel the demand chill now emanating from China.
The slide in copper prices has run out of steam at the start of this week, with the LME three-month contract holding its ground around the $5,600 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.
Editing by Kirsten Donovan