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Copper prices are on track for their worst start to a year in more than three decades. Some investors think the biggest blows from the coronavirus crisis may still lie ahead.
Because copper is used heavily in industry and manufacturing, it tends to respond to shifts in investors’ perceptions of global growth—particularly regarding China, which consumes around half of the world’s supply.
Prices had only started to recover from lows hit amid the trade war between China and the U.S. when reports of the virus’s spread in Wuhan began dragging them down again. 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.
At Monday’s close, copper’s spot price on the London Metal Exchange was $4,763 a metric ton, its lowest price since 2016 and down more than 21% this year. Several investors and analysts said the outlook remains bleak, with shutdowns, border closings and business disruptions all likely to hit demand for copper world-wide.
“The second wave of the coronavirus impact seems to be much more an anticipation about what is to come,” said Chris LaFemina, metals and mining analyst at Jefferies. “The price we’re seeing today in copper is a function of investors’ expectations, rather than demand having already collapsed.”
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.
“There will be considerably more pain for copper before a recovery ensues,” said Natalie Scott-Gray, senior metals analyst at INTL FCStone. “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.”
The coronavirus is also affecting copper supply chains. Copper ore is extracted from mines in places including South America and Southeast Asia, then transported for smelting and refining, most of which happens in China. A state of emergency in Peru, the second-largest copper producer, has forced mining giant Freeport-McMoRan Inc. to curb production.
Freeport-McMoRan shares have fallen 49% this year, according to FactSet, while copper-producers BHP Group PLC and Rio Tinto PLC have lost 26% and 17%, respectively. The benchmark S&P 500 index is down 20% over the same period.
Some analysts said prices could rebound in the second half of the year as the world economy recovers. Jeffrey Currie, head of commodities research at Goldman Sachs, expects copper to reach $6,000 a metric ton by this time next year.
And mining companies know how to operate in a low-price environment, said Mr. LaFemina. As prices remain depressed, miners are more likely to shut down their higher-cost mines, prioritizing value over volume, he says. Citigroup analysts estimate that when copper prices are between $4,600 and $4,800 a metric ton, miners lose money on as much as a quarter of production.
Copper companies “are not just going to produce as much as they can in any market,” said LaFemina. “Anglo-American PLC, Rio Tinto and BHP will reflect production to match demand.”
Still, many are betting copper still has farther to fall. Money managers surveyed by the LME and Comex held the biggest short position against copper since at least 2016. Citigroup analysts said Chinese investors were behind part of the recent selling, and if their bets against copper reach previous bear-market levels, prices could fall another $500 to $700 a metric ton.
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One boost to copper prices could come from major stimulus in China, Europe and the U.S., which should trigger spending on infrastructure and stronger demand, say Société Générale analysts. But any change in the metal’s outlook depends on a clearer understanding of the virus’s effects, which investors admit remains uncertain.
“Demand for the metal and its longer-term prospects haven’t disappeared but simply have been delayed,” said Ms. Scott-Gray. “However two things must be considered: Firstly, the peak of the virus needs to have occurred, and secondly, we need to consider just what damage was done as a result.”
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