Copper Prices May Bounce Back On China GDP After Virus-Induced Sell-Off

Copper prices continue to struggle as the keystone industrial metal collapses under the economic fallout from the COVID-19 pandemic. The price for the red metal is down nearly 18 percent year-to-date, and more than 50 percent from highs set in 2011. However, a recent bounce may reflect growing confidence for the world to stage an economic comeback, particularly in China.

COPPER FUTURES (MONTHLY CHART)

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Chart created in TradingView by Thomas Westwater

FUNDAMENTAL SNAPSHOT:

As a staple industrial metal, copper is especially sensitive to secular trends to demand-side drivers in the economy such as construction, particularly in high-growth major economies, like China. Given that, the slowdown in Chinese economic activity, measured through GDP, helps to explain the downtrend from the 2011 highs in copper.

CHINESE ECONOMIC ACTIVITY MEASURED BY GDP VERSUS COPPER

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THE PATH FORWARD FOR COPPER:

While the current macro landscape appears bleak for copper given the uncertainty regarding the ongoing coronavirus pandemic, there may be opportunity for upside movement. The economic impacts from the virus will likely capitulate as major economies around the world begin to reopen through the coming months. This may help push copper prices higher.

A recent economic outlook report from the IMF provides the most recent projections for economic growth for this year and 2021. According to the report released Tuesday, economic activity in China will contract sharply this year, with GDP growth expected at 1.2 percent. However, the 2021 projections show a strong recovery, with growth rising to 9.2 percent.

IMF PROJECTIONS FOR ECONOMIC GROWTH:

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Source: IMF

Consequently, should the IMF’s projections come to pass, growth in China would lift to the highest level since 2011 when the country recorded a 9.5 percent growth rate. Given the strong correlation between growth in China and the price of copper, it would be apt to assume the red metal will respect the prior correlation.

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