By Clyde Russell
The impact of China’s economic re-opening after ending its strict zero-COVID policy on commodity prices is a reminder that sentiment and physical trading realities are often out of sync.
Commodities from iron ore to crude oil to copper rallied after Beijing’s surprise abandonment of the zero-COVID policy late last year, but have since eased back.
While there are other factors driving commodity prices, it’s also the case that the positive market sentiment created by expectations of a rebound in the world’s second-largest economy ran ahead of actual commodity demand.
China’s imports of major commodities have yet to show any major spike higher, even as they remain at relatively robust levels.
However, it appears the lack of an immediate demand response from China, the world’s biggest buyer of natural resources, has led to some of the froth coming out of commodity prices and perhaps a more cautious note among investors who are now waiting to see if China’s re-opening does lead to higher demand.
The irony is that just as commodity prices are losing some steam, China’s economic momentum appears to be gathering pace.
A key indicator was the jump in China’s new bank loans, which more than tripled in January to a record 4.9 trillion yuan ($720.1 billion) from December’s 1.4 trillion yuan.
While new loans usually rise at the start of a new year, the gain in January showed that spending on infrastructure and construction is likely to increase in coming months.
The main question for commodity markets is how quickly does the cash being injected into the economy flow through to higher demand for raw materials.
A further question is whether China’s economy is yet firing on all cylinders, especially since some indicators of consumer demand remain soft, with new vehicle sales dropping 35% in January from the same month in 2022.
However, there are sufficient signs that China’s economy is starting to turn the corner, even if the process is somewhat uneven and likely to need further targeted measures by the authorities in Beijing.
The response so far in actual commodity flows has been somewhat uneven, similar to the economic recovery process.
IRON ORE RESPONSE
Iron ore is usually one of the commodities that respond fastest, as steel mills buy more of the raw material as they boost output in anticipation of stronger demand in the months ahead.
There are some indications that iron ore imports are starting to pick up, with commodity analysts Kpler tracking arrivals of 99.58 million tonnes in February, which would be down from January’s 107.92 million, but it’s worth noting that last month was the strongest since October 2021.
Put them together and the first two months of 2023 may see iron ore imports of about 207.53 million tonnes, or about 3.52 million tonnes per day, which is well above the 2022 average of 3.03 million tonnes per day.
The acceleration in iron ore imports comes as the spot price for the benchmark 62% grade, as assessed by commodity price reporting agency Argus, comes off the boil, ending at $121.80 a tonne on Monday, down 2.8% from Feb. 10 and some 6% off the 2023 peak of $129.50 on Jan. 30.
Another commodity that has seen prices ease is copper, with London-traded contracts ending at $8,960 a tonne on Monday.
While this was up from the $8,857.50 a tonne close on Feb. 10, it was 4.2% below the 2023 peak of $9,356 on Jan. 23.
China’s copper imports actually rose in 2022, in contrast to declines for iron ore, coal and crude oil, as traders took advantage of higher domestic prices to bring metal in from overseas.
Additionally, imports of unwrought copper gained 6.2% in 2022 to 5.87 million tonnes, suggesting that there is probably plenty of the industrial metal in warehouses that can initially supply any uptick in demand from construction and manufacturing.
Crude oil is the commodity that on the surface would appear to have the biggest potential upside from rising China demand, as domestic fuel consumption rises as people start travelling again and diesel-heavy transport and construction increases.
But much is likely to depend on movements in global crude prices, given Chinese refiners have built up stockpiles and will have the ability to dip into these and limit imports if they deem that prices have risen too far and too fast.
Overall, there is little doubt that China’s re-opening will be positive for the country’s commodity demand.
The trick is working out when the actual physical demand will arrive and what form it will take.
It’s often said a rising tide lifts all boats, but in this case some of the boats will have more buoyancy than others.
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