China’s economic recovery is one of the great hopes of a global economy cornered by uncertainty, inflation and increasing fragmentation. However, a few weeks ago, the first data began to emerge that revealed a loss of momentum in Chinese activity. This ominous omen seems to be confirmed by an almost real-time indicator of the Asian giant’s economy: the price and demand for copper. The price of this metal has entered a market structure known as contango and occurs when some commodity (in this case copper) is in excess in the physical or spot market.
Copper prices surged in January on expectations of a giant ‘dragon’ rising. Returning to life in a country of 1,300 million people – at the end of Covid-zero measures – copper rose nearly 13% in January alone, from a low to a high of $9,300 a tonne. In London Metal Exchange (LME).
Now the feet are reversed. The economy has fallen too quickly, while vague proposals for public stimulus (made by advisers within the People’s Bank of China or the Communist Party) have not been implemented.
Pending the data for May, the indicators published in April in China fell like a “cold water pitcher” on the expectations of the “Asian giant” and the world economy, which this year depends heavily (and if it is possible on other exercises) of Chinese growth.
Industrial production fell by 0.5% in April compared to the previous month. On a year-on-year basis, it grew by only 5.6%, despite a huge base effect that should have supported this figure, as a good portion of industrial areas were under lockdown at that time last year. “This figure of 10.9% yoy is much lower than what markets expected and appears subdued compared to the pre-pandemic trend. Today’s data confirms the weakness in the industry seen in PMI readings.” , Commerzbank economist assured.
“Maybe China is slowly coming out of hibernation After its zero-covid policy, however, its economic data — especially data from sectors critical to demand for raw materials — remains erratic. Taken together, the rally is still not strong enough for a sustained rise in copper prices (and the weakness in Europe and the US hasn’t helped),” says Michael Whitmer, commodity strategist. Bank of America (BofA)
“In China, New orders/inventory rates, a forward-looking indicator, will return to levels that indicate flat year-over-year copper prices. The same is true of credit stimulus, which has risen from low levels but continues to show the selective nature of official support for the economy,” Bank of America’s expert explained in a note to clients.
There is literature that Tests the relationship between the price (demand) of copper and the progress of the economy Countries like China or India, whose economies are still very active in the use of this material. For each additional unit of GDP they produce, for example, they must use more copper and other metals than developed countries.
Overall, copper prices are at their lowest levels not seen since November 2022. The metal has fallen back to where it was before China lifted restrictions due to Covid-19. “Copper has been one of the biggest beneficiaries since China’s reopening, given expectations that China’s support for the real estate market will boost demand for industrial metals,” he explains. Ewa Manthey, ING Economist On a note. Beyond expectations, China’s stable rock demand for the metal has been weaker than expected, even as the country enters a peak construction season.
Weak demand and uncertainty
JPMorgan analysts said in a note to clients this week that they expect some weakness in base metal prices through part of 2023, saying “remaining Chinese demand and broader macro uncertainty weigh on market appetite.” Investors”.
However, JP Morgan strategists acknowledge that these low prices have prompted more inquiries from structurally sound investors, long-term investors, who believe a bottom could form in the prices of these metals. “Despite a subdued and disappointing start to the year against higher bullish expectations, China’s demand for base metals is likely to continue to maintain adequate momentum… Our base case expects China to buy enough copper at $8,000 per tonne, but if there is a more pronounced economic slowdown, the next area of firm support is It could be around $7,400-7,500 per tonne,” the JP Morgan report concedes.
While inquiries into getting ‘long’ – betting on the rise of copper – have increased, current data suggest the opposite view. Investors say one thing, but do the opposite. Speculators are trimming their winning bets on LME copper: Net long positions at 38,416 contracts over 19 weeks are now the least optimistic, according to the exchange’s weekly futures and options data.
On the other hand, Goldman Sachs strategists revised their forecast for average copper prices this year from $9,750 to $8,698 per tonne. Metals have “recessionary prices” in a note collected by the Financial Times.
High interest rates have made banks wary of holding a surplus supply of the metal due to high funding costs. Dramatic setting of “Super Contango”. Metal prices for immediate delivery are much cheaper than futures. As a result, more metal is stored in LME warehouses, which act as a market of last resort.
According to SCI’s website, the price of spot copper, physical copper for immediate delivery, is around $7,900, while the price for three months is closer to $8,000 and the future for delivery in 2024 reaches $8,070. The market offers this type of structure -contango- when there is immediate oversupply because the raw material in question is overproduced or demand collapses. In this case, everything is due to contango “The Fading Recovery in China”According to Goldman Sachs analysts.
After all, raw materials trends aren’t usually eternal — it wasn’t until 2021, when it looked like the world would run out of copper. Falling prices create an incentive for builders and other metal buyers to hoard inventory or make large purchases. “We believe correction and pessimism are justified in the short term, but we remain optimistic in the medium term. We have lowered expectations for refined supply growth to 1.8% (from 2.9%) in 2023 due to supply disruptions. Growth to 3.5% in 2024 as new mines come online and existing As supply constraints resolve, we have lowered our global copper demand growth estimates to 2 .7% this year (from 3.1%) and 3.3% in 2024. Overall, we continue to forecast 105,000 tonnes in 2023 (-0.4% annual demand) and 54,000 in 2024. Tons (-0.2% annual demand) “.
At BofA they use their own model. “We measure demand for copper through two models: apparent consumption (refined production + imports – exports + change in inventories) and underlying purchases (weighting year-on-year sector growth by the share of each sector’s underlying activities) each of which analyzes confirm that demand continues to increase; It also confirms that purchases weakened at the end of the first quarter And second. This, along with the slowdown in activity outside of China, suggests that the red metal is likely to remain volatile for the time being,” Widmer makes. At UBS they are placing copper at $9,500 a ton at the end of the year. 10,000 at the end of the first semester of 2024.