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Coronavirus Fears, Oil Price Plunge Send Copper to 3-Year Low

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Copper prices on the London Metal Exchange on Mar 9, 2020, fell around 3% to $5,433 per ton — the lowest since December 2016 — thanks to plunging oil prices and rampant fears of coronavirus. However, copper recouped some of the loss, closing at $5,598 on Mar 10, 2020, on hopes of major stimulus from China. Nevertheless, the price of the red metal — which is used across a gamut of industries — has gone down 9% so far in 2020 mainly due to the coronavirus outbreak.

Saudi Arabia slashed its official selling price and announced plans to raise crude production significantly. This was in retaliation to a breakdown of talks at the OPEC meeting in which Russia refused to lower its crude production. Oil prices have already been under pressure so far due to the coronavirus outbreak, which has impacted demand. On Mar 8, brent oil futures were down 21% to 35.73 per barrel. Crude oil suffered a 21% drop to 32.52 per barrel on Mar 8. This dealt another severe blow to the stock markets, which were already reeling under the economic implications of the outbreak.

Coronavirus Cases Cross 100,000 Mark & Counting

Per the World Health Organization’s situation report as of Mar 10, 2020, the number of confirmed coronavirus cases globally is at 113,702 and the death toll is at 4,012. In China, the confirmed cases stand at 80,924. Meanwhile, 32,778 cases have been confirmed outside China, with three countries — Italy, the Republic of Korea and Iran — accounting for 72% of the cases. With the rising number of cases in Italy, the country has been put on lockdown in an attempt to put a check on the spread.



Copper Losing Strength

Copper is considered an important barometer for the global economy. The widely-used industrial metal is losing ground on increasing worries of the impact of the coronavirus outbreak on the global economy. Industrial production in China, the world’s biggest metal consumer, took a big hit from the epidemic. The Caixin China General Manufacturing PMI plunged to 40.3 in February 2020 — the lowest level since the survey began in April 2004. Output, new orders and employment declined the most on record. Export sales suffered from shipping restrictions and order cancellations. Supply chains were also hit heavily.

Per the Organisation for Economic Cooperation and Development (“OECD”), an escalation in the coronavirus outbreak could cut global economic growth in half and push several countries into recession. The body projects meager 2.4% growth in the world economy this year — the lowest rate since 2009. The growth rate of China is anticipated to be below 5% this year, suggesting a decline from 6.1% reported last year, which was the weakest growth rate in almost 30 years.

Before the coronavirus outbreak, copper prices had been gaining on hopes of easing trade tensions and pickup in manufacturing would help push the price of the metal higher.

Copper miners fall under the Zacks Mining - Non Ferrous industry, which has dropped 18.8% over the past year compared with the S&P 500’s decline of 2.3%. The industry falls under the broader Basic Material sector, which declined 28.5%.



The industry currently carries a Zacks Industry Rank #202, which places it at the bottom 20% of more than 250 Zacks industries. The group's Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates gloomy prospects in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since the beginning of the year, the industry’s earnings estimate for the current year has moved down 10%.

Copper Poised Well for the Long Haul

In the near term, the coronavirus fears will likely weigh on copper prices until the situation stabilizes. However, increased stimulus from the China government will likely lift prices from the second half of the year.

The long-term outlook for copper is positive as demand is anticipated to improve on investments in electric vehicles and renewable energy, and infrastructure. Further, expectations of rising middle class in Asia, particularly China and India, will likely stimulate demand for copper. However, a grade decline, rising input costs, water constraints and a scarcity of high-quality future development opportunities continue to constrain the industry’s supply. The demand-supply imbalance will probably push copper prices north. Consequently, big miners like BHP Group (BHP - Free Report) , Rio Tinto plc (RIO - Free Report) and Vale S.A (VALE - Free Report) are focusing on increasing their copper exposure to cash in on prospects.

None of the stocks in the industry currently carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Investors interested in the industry may consider keeping an eye on stocks like Southern Copper Corporation (SCCO - Free Report) and Freeport-McMoRan Inc. (FCX - Free Report) . Both companies carry a Zacks Rank #3 (Hold) at present and have positive earnings estimates for 2020.

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