Initial COVID-19 impact on copper is bearish

Initial COVID-19 impact on copper is bearish

The red metals sector has numerous factors to consider when valuing copper’s medium-term worth.

March 31, 2020
Brian Taylor

For every factor weighing down the current price of copper, producers, users and traders of red metal have several others to consider that could quickly cause demand for the metal to rebound in the post-COVID-19 economy.

With the slowdown of the world’s largest economies first in Asia, followed by Europe and North America, speculators have made clear in March where they stand on copper. The price of the red metal on global exchanges has trended sharply downward in March.

The short-term reasons for copper’s price plunge are apparent: global supply largely held steady while demand plummeted first in China and then other parts of the world as the COVID-19 coronavirus caused workplaces to shutter—and household consumer spending to hit the pause button.

Economists have subsequently tried to imagine both when and how these same economies will recover once public health officials begin giving the green light to (what will likely be) phased-in returns to economic activity around the world.

As COVID-19 was just beginning to affect the United States economy on March 11, Ed Sullivan of the Portland Cement Association in that nation gave a prediction that a fairly rapid (or V-shaped) recovery was possible in the U.S., based on pent-up consumer demand after stay-at-home orders are rescinded.

That scenario is far from guaranteed, with the elements of such a recovery involving not only the return of positive household consumer sentiment, but also the ability and willingness of governments around the world to inject money into infrastructure and other public works projects.

Governments in China, the United Kingdom, the U.S. and elsewhere have passed stimulus plans that promise big spending on paper, but how much of that will go into the basic materials and red metals sectors is unclear.

A survey of more than 13,000 global respondents in the engineering, construction, finance, public works and technology sectors found little optimism that infrastructure spending would boom in the wake of COVID-19.

The survey by Washington-based CG/LA Infrastructure found only 5 percent of those responding predict investment will “increase significantly” following the pandemic. That marks a sharp decline from 34 percent who expressed optimism for the second half of 2020 before the health crisis.

Prior to the crisis only 10 percent of respondents thought infrastructure investment would decrease (7 percent), or decrease significantly (3 percent) in the remainder of 2020, but now 52 percent believe such spending will decline (34 percent) or even decline significantly (18 percent).

As household consumers have been hit with “shelter in place” orders in Europe, North America and other parts of the world, many of them also are faced with reduced or lost income.

Among the foremost victims of the shriveled household consumer economy has been the automotive sector. Passenger vehicle sales in Europe and North America seem destined to follow the pattern set in China, where entire weeks or even months can be “lost” to impacts of COVID-19.

Another victim has been the price of oil, which has fallen to a low not seen since the 2008-2009 financial crisis. That could draw momentum away from electric vehicles (EVs), which had begun to capture growing market share heading into the epidemic. EVs use significant amounts of copper and also require a charging infrastructure partially depending on copper cables and wires.

Government incentives and mandates in many parts of the world could nonetheless revive the EV segment once drivers are again ready to seek new vehicles in the aftermath of COVID-19.

Testing that seems to indicate copper and brass have anti-microbial (or germ-busting) capabilities may open new doors for red metals. Several studies claim to have witnessed copper’s ability to provide an inhospitable surface to germs and viruses, which could allow it to play a larger role in hospital, food service and agribusiness applications.

EVs and germ-busting notwithstanding, it will likely take an overall economic rebound before copper demand can begin to catch up with reported inventory buildups of the red metal.

Writing on March 29 in a note accompanying his United States-based “Copper Journal” e-mailed publication, John Gross says copper’s exchange pricing in that nation has “has held the $2.00 [per pound] low for a second week.”

Concludes Gross, “We know that ‘hope isn’t a very good trading strategy,’ but with fingers crossed, hopefully, we have seen the low. Don’t take that as a forecast, but rather [as] a bit of wishful thinking in these turbulent times.”

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