Copper and iron ore are rallying as China reopens its vast economy, with benchmark copper prices passing $9,000 per tonne on Wednesday for the first time since June.
The end of Covid-19 restrictions in China — the world’s largest consumer of commodities — has triggered a jump in a range of metals exposed to the Chinese property sector such as copper, steel and aluminium, although some analysts and traders expect these gains may not be sustained throughout the year.
“We are expecting a rapid rebound in China’s economy,” said Caroline Bain, commodities economist at Capital Economics. “As momentum gathers in China’s economy and as the prospect of Fed loosening becomes a reality later in the year, we think commodity prices are in for quite a positive period, meaning higher prices by the end of the year.”
Iron ore, the key ingredient in steelmaking, has risen 50 per cent since its low in June, surging to more than $120 per tonne in the benchmark Qingdao spot market for high-quality ore, according to pricing data from Argus.
Restocking activities are expected to create a surge in perceived buying, as commodity users such as steel mills build up their inventories from very low levels.
“Chinese mills have been maintaining limited inventories in recent months” and are now restocking, said Siew Hua Seah, editor at Argus Ferrous Markets. “Expectations for strong demand after the Chinese new year holiday have also lent support to prices,” she added.
The rise in iron ore prices has pushed up the value of miners like BHP, whose London shares reached an all-time high on Wednesday.
Despite the loosening of Covid restrictions, the outlook for the Chinese economy this year is murky, however, causing other analysts to caution that this rally might only be temporary.
China’s GDP growth has been below target in recent quarters. The property sector — a key driver of commodities demand — is also at its lowest level of new construction in more than a decade, according to investment bank Macquarie. The impact of the wave of recent Covid infections on the workforce is also unclear, as hospitals are reported to be overflowing.
The upcoming Chinese new year holiday, which falls around January 22, will delay China’s regular economic releases and make it more difficult to gain a clear picture of the state of the economy.
“We are a bit cautious because the commodities-intensive sectors such as property are really built out,” said Tom Price, head of commodities at Liberum.
The question of whether construction can recover sufficiently to match the levels of activity in China last year is one of the key questions for commodity markets in the longer term.
“The construction sector is really weak,” said Marcus Garvey, head of metals and bulk commodity strategy at Macquarie. “The big question mark is how much of an improvement do you get in new construction starts.”
Colin Hamilton, commodities analyst at BMO Capital Markets, said asset managers have also been increasing their allocations to certain commodities due to a weakening dollar and gloomy economic outlook in the west, helping to drive the rally.
“China is expected to get better and the rest of the world is expected to get worse. And the playbook for that is to own metals exposure,” said Hamilton.
Benchmark aluminium prices have increased 10 per cent in the past three days, while prices for zinc are up 5 per cent over that same period.