https://www.mining.com/web/column-copper-iron-ore-yet-to-reflect-chinas-weakening-industrial-outlook/
(The opinions expressed here are those of the author, Clyde Russell, a columnist for Reuters.)
The slump in China’s main manufacturing sentiment index has yet to be
fully reflected in prices for key metals, which remain well above
levels seen during previous bouts of weakness in the industrial sector
of the world’s second-largest economy.
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The official Purchasing Managers’ Index (PMI) fell to 47.4 points in
April, down from 49.5 in March and the weakest outcome since February
2020, China’s National Bureau of Statistics said on April 30.
It was the second straight month for the index below the 50 mark
separating growth from contraction, and the soft outcome came amid a
series of coronavirus lockdowns in major cities, including Shanghai.
There are also worries that China’s strict zero-covid policy means
more cities will be locked down, including the capital Beijing, with
restrictions lasting for longer than the market had initially expected.
The ongoing lockdowns will make it more challenging for China to meet
its 5.5% economic growth target for 2022, especially since the current
quarter appears likely to be weak, with some economists saying a
negative gross domestic product number is a possibility.
With China’s economic worries stacking up, it is perhaps surprising
that prices of some key industrial metals haven’t retreated more.
No major commodity depends more on Chinese demand than iron ore – almost 70% of global seaborne volumes are shipped to the world’s biggest buyer.
The spot price of benchmark 62% iron ore for delivery to north China,
as assessed by commodity price reporting agency Argus, ended at $146.50
a tonne on April 29, admittedly before the weekend release of the PMI
data.
It has dropped 8.5% from the peak so far this year of $160.30 a tonne
on March 8, reached in the wake of Russia’s attack on Ukraine, which
prior to the invasion had been the fourth-biggest shipper of iron ore.
But iron ore is still well above $105.95 a tonne – the price
prevailing in October, 2021, when China’s PMI last dropped below the 50
level.
It is also significantly higher than the $83.15 a tonne from February
2020, when China’s PMI plunged as the initial wave of the coronavirus
pandemic hit economic activity.
When China’s PMI was below 50 in February 2019, the iron ore price
was $84.70 a tonne, and when the PMI was at 49 points in February 2016,
spot iron ore was at $48.65.
There are other factors that drive iron ore prices beside the
relative strength of China’s manufacturing sector, but some of these are
also looking fairly bearish, namely infrastructure and construction
spending.
Iron ore inventories at Chinese ports rose to 149 million tonnes in
the week to April 29 from 148.6 million the prior week. While this down
from the 2022 peak of 160.95 million tonnes in mid-February it is well
above the 133.1 million tonnes in the same week in 2021 and the 117.95
million at the end of April 2020.
The current high level of inventories suggest steel mills will have
little incentive to buy additional iron ore, especially given the still
strong spot prices. Instead they may be inclined to bet that prices will
decline in line with the current weak activity, rather than hold up in
anticipation of still to be delivered stimulus.
Copper holding up
Like iron ore, copper prices have remained elevated relative to the weakness in China’s PMIs.
China produces about half of global refined copper and is the world’s largest importer of the metal.
Benchmark London copper ended at $9,769.50 a tonne on April 30, down 8.5% from the record closing high of $10.674 on March 4.
However, the contract is still well above the prices that prevailed
when China’s PMI has dipped into negative territory in recent years.
For example, when China’s PMI slumped to 35.7 in February 2020,
copper was at $5,635 a tonne, and it was at $6,509 in February 2019, and
$4,695 in February 2016.
It may be the case that iron ore and copper are trading more on the
expectation of a massive stimulus programme by Beijing in the second
half of the year.
Certainly, China’s Communist Party leadership is trying to get across
the message that the economy will be supported. When the Politburo met
on April 30, it pledged support for industries hit by Covid-19
lockdowns, and to boost work on infrastructure and supply chains.
What is lacking is details on what stimulus measures will be implemented, their size and how quickly they will be delivered.
Until this becomes clearer, it seems that iron ore and copper may
currently be priced more for the hope of upcoming stimulus than for the
current signs of sagging industrial activity.
(Editing by Simon Cameron-Moore)
